The Morning Show: Japanese Stocks Party Like It’s 1990

The Morning Show: Japanese Stocks Party Like It’s 1990

A man walks in front of an electronic board displaying the level of 10-year Japanese government bonds, the current Japanese yen exchange rate against the US dollar and the Nikkei stock average, outside a brokerage firm in Tokyo, Japan, October 31, 2023. REUTERS/Kim Kyung-hoon Get License Rights

A look at the day ahead in European and global markets as of Monday.

It was a mixed start for most Asian markets this holiday-cut week, although Japanese stocks extended their rally to highs not seen since 1990.

The Nikkei is up more than 8% so far this month, and about 29% so far for the year. The broader Topix is ​​up 26% over the year, but it still only trades at a price-to-earnings ratio of 14. That compares to 23 for the S&P 500 and about 29 for the Nasdaq.

The entire market capitalization of the Topix index is 454 trillion yen ($3.03 trillion), yet Japanese companies were holding internal reserves of 555 trillion yen at the end of the fiscal year. Half of Japanese listed companies trade below book value, and in total they hold 20% more cash than their market value.

Corporate earnings excluding financials reached a record high of 32 trillion yen in the April-June quarter, and recent earnings results showed the benefit of a weaker yen and the return of some pricing power after decades of deflation.

Recent surveys show that inflation expectations are finally improving, which may prompt households to invest some of the 1,000 trillion yen they currently hold in cash and deposits in stocks and bonds.

Japanese consumer price data for October is due on Friday and is expected to show policy rates have risen again to 3.0%, well above the Bank of Japan’s 2% target.

The strong pay round and early signs of more bumper pay awards for next year are fueling speculation that the Bank of Japan will finally ease its accommodative policy, perhaps even turning interest rates positive — a big boon for financial sector stocks.

China’s central bank kept key interest rates steady on Monday as widely expected, but set another firm yuan fix that sent the dollar below 7.2000 and falling more broadly.

Media reports spoke of Israel, the United States, and Hamas reaching an initial agreement to release dozens of hostages in Gaza in exchange for a five-day cessation of fighting, but this has not been confirmed yet.

S&P 500 and Nasdaq futures traded more weakly on Monday, but were still up sharply on the year so far driven by huge gains by the Big 7 companies.

Technology major Nvidia (NVDA.O) reported its quarterly results on Tuesday, and all eyes will be on the state of demand for its AI-related products.

Black Friday sales will test the pulse of the consumer-driven US economy this week, while the Thanksgiving holiday will lead to thin trades.

The flow of US economic data is turning into a steady stream this week, but minutes from the Federal Reserve’s latest meeting will give some color to policymakers’ thinking as they hold interest rates steady for a second time.

Markets are clearly vulnerable to any hawkish hints as they have priced in early and aggressive easing for 2024.

Futures imply zero chance of further upside in December or next year, and imply a 30% chance of easing from March. Futures also point to cuts of around 100 basis points for 2024, up from 77 basis points before October’s benign inflation report rattled markets.

Key developments that may impact markets on Monday:

– German Producer Price Index for October, EU construction production

– The appearance of the Governor of the Bank of France, de Galhão, the Governor of the Bank of Spain, De Cos, and the Governor of the Bank of England, Bailey

– Fed’s Barkin appears on TV

($1 = 149.6200 yen)

Written by Wayne Cole; Edited by Christopher Cushing

Our Standards: The Thomson Reuters Trust Principles.

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