Japan

• Where Now for CEE and Baltic Currencies?-

  Ever since the illusive credit turmoil began sentiment in the market place has been fickle and essentially, like the assets of which it consists, volatile. We started off with an adamant focus on downside risks to growth which then turned into a focus and fear of inflation. Now, as the cyclical data has turned for the worse in Europe and many places in Asia the focus seems to be reverting to growth. Now, I won't go into the whole decoupling v recoupling discussion at this point since I think that this dichotomy is a false one. It never was about de-coupling à la traditionelle but moreso about two interrelated points. The first would be the extent to which the world already has decoupled from the US in the sense that a key group of emerging economies are now set to ascend in economic prowess. The second would be the extent to which the de-coupling thesis always built on a fallacy.

• The Baltics, Lithuania, and Eastern Europe ... redux-

  THE weather deities are extraordinarily generous at the moment here in Copenhagen and being cooped up in a 17m2 studio does not exactly inspire to being a good protestant. However, financial markets and news streams are serving up a nice batch of data points and being the wonk I am, I am keeping tap; even if the beaches of Zealand have (and will be) frequented more than a couple of times.
  

• The Eurozone - That Sinking Feeling?-

  One need not be well versed in the art of reading entrails or posses any other kind of unworldly powers to see that the Eurozone economy may be about to head off over the cliff. Now, just as the Q1 GDP figure was something of a technical glitch due to the forward pushing of investment which made Germany ride an impressive 1.5% reading q-o-q, so is the corresponding Q2 figure likely to be a similar (negative) glitch. The only important question is the extent of the slowdown since without that we really cannot build any sound forecasts for an annual growth rate of the Eurozone not to speak of Germany itself.

• The Eurozone - That Sinking Feeling?-

  One need not be well versed in the art of reading enthrails or posses any other kind of unworldly powers to see that the Eurozone economy may be about to head off over the cliff. Now, just as the Q1 GDP figure was something of a technical glitch due to the forward pushing of investment which made Germany ride an impressive 1.5% reading q-o-q, so is the corresponding Q2 figure likely to be a similar (negative) glitch. The only important question is the extent of the slowdown since without that we really cannot build any sound forecasts for an annual growth rate of the Eurozone not to speak of Germany itself.  

• A Year (Week) on the Wild Side?-

  

  [Update: Brad Setser clarifies, in the comment section, his view on Sender's FT piece referenced below]
  

  THE last week (or was that year?) has certainly been something of a ride hasn't? In fact, I thought it would be apt to reproduce this picture by the brilliant KAL who normally spices up the Economist with his imagery that lay serious claim to the adage that a picture tells more than a thousand words. This particular specimen and the ensuing headline were on the front cover in October 1997 when markets also took investors and observers for a roller-coaster ride. I think it is quite fitting in describing the feeling many a trader and market participant must have at the moment.

• Investment Externalities and Investors' Search for Yield-

  Many people have rules upon which they lead their lives and conduct their behavior; in fact, one could argue that most people would subscribe to this some way or the other. My readers should immediately be assured that I am not in the process of morphing Alpha.Sources into some kind of quasi philosophical column; nor would I dare embark on an account of the specific rules I live by myself. However, one very simple rule which I have found quite useful is what I have chosen to dub the "one paper a week" rule.

• The ECB - Walking the Walk?-

  As the proverbial end of the road nears for the ECB and the July meeting it is as if the market divinities have been trying their utmost to penetrate the ivory tower in Frankfurt. Of course, I am not sure that my readers have been sticking their heads into their Bloomberg terminals with the same vigour as I have, but I can tell you that the past week's news from the Eurozone has been devastating. Now, if you are confused I can understand. I mean, was this not exactly the point with the ECB's hawkishness in the sense that it would jolt the Eurozone economies to such an extent that inflation would squirm back below the 2% mark? Indeed it was but as I have been warning several times, the asymmetric nature of the current slowdown and ultimately its severity across the entire zone makes this a very dangerous policy choice.

• The ECB - Walking the Walk?-

  As the proverbial end of the road nears for the ECB and the July meeting it is as if the market divinities have been trying their utmost to penetrate the ivory tower in Frankfurt. Of course, I am not sure that my readers have been sticking their heads into their Bloomberg terminals with the same vigour as I have, but I can tell you that the past week's news from the Eurozone has been devastating. Now, if you are confused I can understand. I mean, was this not exactly the point with the ECB's hawkishness in the sense that it would jolt the Eurozone economies to such an extent that inflation would squirm back below the 2% mark? Indeed it was but as I have been warning several times, the asymmetric nature of the current slowdown and ultimately its severity across the entire zone makes this a very dangerous policy choice.

• Fundamentals To Drive the Yen?-

  Hot in on the heels of my paper on carry trade and risk aversion it seems as if the Yen is now reverting to those famous fundamentals. Consequently, we learned a few days ago how JPMorgan were telling their clients and the rest of us how the Yen is likely to decline to 114 as Japanese investors buy debt which is not denominated in Yen (i.e. depreciation due to outflows).

  The yen may weaken to 112 per dollar by March 2009 as Japanese individual investors shift money into foreign-currency bonds from investment trusts, said Tohru Sasaki, chief currency strategist in Tokyo at JPMorgan Chase & Co.

• Fundamentals To Drive the Yen?-

  Hot in on the heels of my paper on carry trade and risk aversion it seems as if the Yen is now reverting to those famous fundamentals. Consequently, we learned a few days ago how JPMorgan were telling their clients and the rest of us how the Yen is likely to decline to 114 as Japanese investors buy debt which is not denominated in Yen (i.e. depreciation due to outflows).

  The yen may weaken to 112 per dollar by March 2009 as Japanese individual investors shift money into foreign-currency bonds from investment trusts, said Tohru Sasaki, chief currency strategist in Tokyo at JPMorgan Chase & Co.

• Understanding Why EUR/JPY Hit a Record High-

  Although it has been relatively quiet in the foreign exchange market today, the Euro hit a record high against the Japanese Yen. The primary reason why EUR/JPY has rallied 11 percent over the past 3.5 months is because of US growth - not many people realize that the price action of EUR/JPY is directly correlated with how the US economy is doing.

  According to the following chart, there is a strong correlation between manufacturing ISM and EUR/JPY. The arrows on the chart point to the times when manufacturing ISM had a meaningful dip below the 50 boom / bust level. This has happened more than 7 times over the past 20 years. Each time the US manufacturing sector contracted, EUR/JPY rallied. On average, from the month that ISM contracted to the month that ISM moved back above 50, EUR/JPY rallied 314 pips.

  

• The Danish Economy under the Loop-

  There is certainly a lot of commotion at the moment not least surrounding ww.marginalrevolution.com/marginalrevolution/2008/07/parsing-paulson.html">the rescue plan to shore up the two biggest US mortgage lenders Fannie and Freddie Mae, but also, and if we stay in the US we had the collapse of IndyMac, in Spain Martina-Fadesa is in the ropes and in Denmark we have Roskilde Bank.

• A Year (Week) on the Wild Side?-

  

  [Update: Brad Setser clarifies, in the comment section, his view on Sender's FT piece referenced below]
  

  THE last week (or was that year?) has certainly been something of a ride hasn't? In fact, I thought it would be apt to reproduce this picture by the brilliant KAL who normally spices up the Economist with his imagery that lay serious claim to the adage that a picture tells more than a thousand words. This particular specimen and the ensuing headline were on the front cover in October 1997 when markets also took investors and observers for a roller-coaster ride. I think it is quite fitting in describing the feeling many a trader and market participant must have at the moment.

   

• Japan Export Slowdown- Japan just released its May trade surplus report, and although it beat expectations, it was down for the third straight month, hurt by rising prices for the Oil that Japan imports.
  
  While exports to China and the rest of Asia were strong, analysts said the gain was a little deceptive, as shipments to China were artificially boosted after the recent earthquake on May 12.
  
  Even more important was that:
  
  1) Exports to the U.S. fell 9.5% as demand for Japanese cars and other products slowed.
  
  2) Exports to Europe were down for the first time in 31 months.
  
  Is this more evidence that the decoupling theory is not valid? Last week it was reported that exports from Singapore to the developed world were down as well.
  
  Here is a list of important questions to answer:
  
  Is it possible that the economic recession in the U.S will lead to a decline in Consumer spending on discretionary items?
  
• Picture du Jour: Sun Rising Over Japanese Stocks-

  Scanning the globe for investment destinations can be a daunting task. When it comes to stock markets, however, relative strength analysis serves a useful purpose of highlighting under- or outperforming markets (or individual stocks) at a glance. Having perused a bunch of these charts, the Japanese situation stands out as being of particular interest.

  Firstly, let’s look at the long-term chart of the Nikkei 225 Average. Japan’s stock market had an extended multi-year rally that started in earnest in the 70s and accelerated sharply in the 80s. The Nikkei peaked on December 29, 1989 at 38,915. During the devastating deflationary period that ensued the average dropped by a massive 80.5% to 7,607 on April 28, 2003. The Nikkei staged a recovery from 2003 until 2007 when the sub-prime fallout came into play.

  

  Source: I-Net Bridge

• Has the Fat Lady Sung?: Japanese Stocks Will Turn When US Treasuries Turn- In November 2007, we openly wondered which big institution would bite the dust and trigger the extreme policy response that eventually broke the negative credit spiral. While there are conspiracy theories that Bear Stearns (BSC) was deliberately shot down by rumor-mongering so it could be bought for a song, some are also suggesting that Bear Stearns may also represent the equivalent of the “fat lady” singing i.e., the beginning of the end of this credit crisis opera. The Fed has pulled out all the stops to get its arms around a massive credit crisis. Most importantly, they have opened the Fed’s discount window to securities firms for the first time since the Depression, while the government has relaxed the capital rules for Freddie Mac and Fannie Mae, ostensibly to put a prop under the collapsing US mortgage market.
• $NIKK - Japan market new lows w/ bullish divy- Posted for no other reason than I saw this and wanted to document it. Let's see how this plays out. A test of our bottom feeder w/ bullish divergence modus operandi. I do not own this market however.
• Pricing Japanese Banks for Bankruptcy is Overdoing It- Many have dismissed the Fed’s unprecedented 75bps inter-meeting cut as an overreaction to plunging equity prices and/or an effort to get ahead of the subprime contagion curve, which they have fallen significantly behind. However, what if the move was in response to the potential for a much more serious credit crisis that is still working its way through the global financial system?
• Which Way Japan Market & ETFs?-

  Which way will Japan exchange-traded funds such as the iShares MSCI Japan (EWJ) go as negative economic news fights what is perceived as very attractive valuations?