Japan Sales Tax Hike Delayed to 2019, US Beige Book Show "Modest" Improvements, Pound Imp. Volatility Elevated, ASX SPI200 Futures Up 3 Points

The big news out of Asia yesterday was that Japanese Prime Minister Shinzo Abe has announced a delay in the sales tax hike from 8% to 10% due to occur in 2017 back to October 2019. In the announcement Abe said he would “mobilize fiscal policy to achieve strong growth”, while this will be positive for consumer spending in the near-term it does raise concerns about servicing Japan’s enormous government debt, current 229% of GDP the highest level globally. This now prompts speculation as to question whether we will see any further easing from the Bank of Japan, in response the Yen strengthened 1.11%. Japan is in a tough situation, two decades of stagnant growth, an inefficient workforce, and a declining and ageing population these are not issues that can be fixed in the very short term and will take years to change. With the Bank of Japan already a huge player in the Japanese ETF market, owning the majority of Japanese Government Bonds and with negative rates already in play I feel the bank of Japan nearly reached the limit of their monetary abilities, with the next option looking to Monetary Financed Fiscal Policies (MFFP or helicopter money).

US equities made modest gains following an increase in US ISM Manufacturing (MoM May) of 51.3 vs 50.8 prior, the Federal Reserve also released its “beige book” showing that the US economy continues to improve at a “modest” pace as labour markets continued to tighten. There was also evidence showing wages and price pressures marginally increased in the majority of districts, the S&P500 closed 0.11% higher while the Nasdaq100 finished down 0.08%. The market will continue to look towards Friday’s non-farm payroll data as an indication whether the Fed will potentially act in June or July in raising rates. European equities were weaker ahead of the ECB rate decision on Thursday where it is widely expected there will be no changes following the increased stimulus in March. The DAX30 & FTSE100 down -0.57% & -0.62% respectively following an opinion poll released by the Guardian showing the campaign to leave the EU was ahead. This is undoubtedly a key risk and could have major implications to the global economy if the UK were to exit the EU, while I believe this is the less likely scenario as the negative economic impacts of leaving for far outweigh the benefits it is a possibility that needs to be considered. Leading up to the June 23rd referendum we will not doubt continue to see more headlines covering this and I expect many investors to remain on the sidelines until we have an outcome. The image below highlights the implied volatility in the British Pound, calculated by call and put options now at the highest level since 2009. Interestingly the moves in the Pound have not been large compared with the volatility suggesting traders are hedging risk through the options market.

Locally the ASX200 closed 55.39 points lower on Wednesday (-1.03%) while ASX SPI200 futures are up 3 points suggesting a relatively flat open this morning. This was despite data that showed GDP for the first quarter grew at 1.1% and at 3.1% year-on-year, with the largest contributions coming from household consumption (+0.4%) and exports (1%), export growth now represent the final stage of the resources boom where producers are able to produce and ship larger quantities overseas. While this is positive for the economy and GDP growth of 3.1% in a world of lacklustre growth is fantastic it will likely do little to stimulate inflation domestically.  In the same release data also showed that our terms of trade fell by 1.9%, which is a decrease in our export prices relative to import prices, highlighting the continued decline in commodity prices.

Data releases:

·         Australian Trade Balance & Retail Sales (MoM Apr) 11:30am AEST

·         Japanese Consumer Confidence (MoM May) 3:00pm AEST

·         UK Markit UK Construction PMI (MoM May) 6:30pm AEST

·         ECB Rate Decision (Jun) 9:45pm AEST

·         US ADP Employment, Initial & Continuing Jobless Claims (May) 10:15-10:30pm AEST

·         US Crude Oil Investories (May 27th) 1:00am AEST


Source: Rivkin, Bloomberg

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This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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