Japanese election sees pro-growth Takaichi secure landslide victory

A positive start to the week in Europe, following on from Friday’s rebound that saw the software selloff abate somewhat. While these periodic tech washouts ultimately seem to be short-term jitters within a wider AI bull-case, the European equity space often appears to become one main benefactor as investors seek safety. Today’s FTSE 100 gains have been centred around the mining and defence stocks; two key themes that have helped lift the index into record high territory on a number of occasions over the past year. However, in reality the vast majority of the index finds itself in the green today, with NatWest providing the only real drag amidst a 4% decline in the wake of a £2.7bn deal to buy wealth manager Evelyn Partners. 

The Japanese election grabbed the headlines in Asia, with Sanae Takaichi securing a landslide election victory that emboldens her pro-growth, high spending policy agenda. Despite the record high treasury yields seen in the week following her call for a snap election, fears around debt sustainability in the event of her victory appear to have eased somewhat. This culminated in today’s decline in both Japanese yields and USDJPY, as the narrative around how Takaichi would further raise borrowing shifted to the potential use of their $1.3 trillion FX reserves. Notably, any decision to instead draw upon those reserves would limit the funds required to prop up the Yen, with the decline of the currency often met by centralised intervention in a bid to encourage greater stability for a currency that has halved in value against the dollar over the past 15 years. Nonetheless, the fact that we are seeing some support come in for the yen does highlight that the weekends result brought about a “buy-the-news, sell-the-fact” scenario given the high likeliness of a strong showing in the polls. The question for markets will now revolve around quite how Takaichi can embark upon a raft of expansive fiscal measures without piling further pressure on the finances of a country whose 236% debt-to-GDP figure looks set to grow amid record high borrowing costs. 

There is a hope that this week will bring a more optimistic tone following the sharp declines and volatility seen over the beginning of February thus far. The sharp pullback seen in the precious metals space looks to have eased for now, with both gold and silver gaining at a relatively controlled pace. Meanwhile, US futures point towards a largely flat open following a week that saw tech-led losses drive the Nasdaq 5% lower (much of which was regained on Friday). Coming out of a period that has seen the vast majority of the Mag7 report, there should be greater clarity over the direction of travel for the sector. However, last week’s Anthropic-led declines highlight jitters that centre around the question of whether we will see value and growth destruction for a number of businesses as AI services disrupt high-value industries across data, consultancy, legal, and software. Nonetheless, one theme that continues to play out is the redistribution of capital across the spectrum of US assets, as investors seek out pro-cyclical stocks that are shielded from AI disruption and will benefit from a Fed Chair that seeks to reallocate capital from Wall Street to Main Street. The weekend discussions around Warsh’s willingness to create an accord that sees the Treasury and Fed work together does highlight a pro-growth strategy that isn’t simply targeting inflation and unemployment. However, there will undoubtedly be continued concerns around the Fed’s independence if Warsh listens to the likes of Trump and Bessant as much as the data.