NIKKEI225 Set to End Second Successive Week in the Red

Posted on October 25, 2024October 25, 2024 by Gino Bruno D'Alessio

Japanese stock market turns its attention to upcoming general elections and BoJ policy meeting.

Japanese stocks have taken a beating over the past two weeks, with the [[NIKKEI225]] dropping 2.25% over that period. Investors have started to see risk from the general elections scheduled for this Sunday.

The recent surveys are pointing to the chance that the current Liberal Democratic Party leader and prime minister Ishiba may lose his outright majority. A recent poll by the Asahi newspaper showed that the current alliance between the LDP and Komeito may lose up to 50 seats.

The coalition currently holds 247 seats and would need at least 233 to maintain a majority. The Asahi poll reflects the ongoing mistrust of the LDP party, which has been wrought by an embezzlement scandal under the previous prime minister.

[[NIKKEI225-graph]]

Bank of Japan Dovish to Hawkish

Next week the BoJ will hold its scheduled policy meeting on October 30 and 31. The market is beginning to expect a change from the dovish stance used to calm the markets. The latest comments and analysis indicate that the comments from the central bank will turn more hawkish.

There are signs that the USA has averted an economic slowdown after a slew of positive economic data. This could be the main talking point to lead their forward guidance. The BoJ and government officials have repeatedly stated that they will not tolerate a weak yen.

This I believe is more likely the reason to talk up the chance of further rate hikes. Of course, justified by the resilience of the local and global economy. The yen fell to 153.00 at one point to the dollar this week.

The central bank believes that inflation will settle below their 2% target by 2027. However. The economy is expected to recover. And there is also talk of a labor shortage as the economy recovers.

The labor shortage is expected to drive up salary hikes and may pile on price pressure as companies raise their prices. The central bank is expected to keep the main interest rate at 0.25%.

CAC Shakes Off Weak PMI Data – ECB Policy in Front Seat, Political Woes on Sidelines

Posted on October 24, 2024 by Gino Bruno D'Alessio

And

Data released today showed a sharp decline in business confidence and Flash PMI data. Concerns over the national budget take a back seat.

For today’s Flash HCOB Services and Manufacturing PMIs analysts had been expecting a slight increase. Instead, the market was presented with declines in both.

The Services PMI showed a provisional decline to 48.3 from 49.6 previously, while the manufacturing PMI declined slightly to 44.5 from 44.6. And Business Confidence took a hit, with a drop to 92 from last month’s reading of 98.

The [[CAC]] managed to shake off the negative surprise in the data and rallied to 0.67% on the day. Political concerns have been acting as a weight for French stocks. The govenment presented the 2025 budget to the National Assembly on October10, but investors are concerned about the weight of tax hikes on large companies.

Those concerns seem to have taken the back seat as the market follows bullish ECB sentiment, with the [[DAX]] leading the way, up 0.82%.

[[CAC-graph]]

ECB Sentiment Grows

Sentiment on dovish ECB policy action is growing. Investors are gearing up for a bumper cut in rates at the next policy meeting. The anticipation of a 50 basis point cut in interest rates for the December meeting has been circulating for a few days.

That sentiment is gaining more conviction as comments from various ECB policymakers and national central bankers call for sharp cuts. The latest official to add statements of the kind is Bostjan Vasle.

In a Reuters interview, Vasle said that the ECB should take measured steps to keep cutting rates. Adding that talk of undershooting the inflation target is unwarranted now. The central banker said that going below the neutral rate is not an issue in this environment.

The GDP growth in the ECB has been weak and is expected to decline for FY 2024. The market is beginning to believe that the ECB may act swiftly to cut rates to a level of economic stimulus. The chance of a 50bp cut in December is now at around 40%.

UK Government Borrowing Higher than Expected – FTSE Takes a Dive

Posted on October 22, 2024 by Gino Bruno D'Alessio

Data today showed that public borrowing for H1of fiscal year 2024 came in higher than official forecasts. The higher debt underscores the challenges the finance minister faces to implement the budget.

Government borrowing between April and September rose to £79.6 billion. Surpassing the Office for Budget Responsibility’s (OBR) projection by nearly £7 billion. In September, borrowing mounted to £16.6 billion, which is £1.5 billion higher than the OBR’s forecast.

The extent of the borrowing is highlighted by the fact that this September was the third highest level of borrowing since records began in 1993. The [[FTSE]] didn’t receive the news very well, and the index is down 0.64% so far today.

Economists expect that Reeves, the finance minister, will be obligated to raise taxes in the budget she presents October 30. The only other solution to the situation would be to cut government spending.

That type of action seems unlikely given the social policies of the current Labour government. Reeves has stated that she wants to increase government spending to improve infrastructure and services.

She also added that taxes will have to go up, although she committed to not raising the main rates of taxation. The likely revenue increases will come from national insurance contributions, capital gains, and inheritance tax.

While employer groups have raised the concern that higher taxation will stifle the government’s target of doubling economic growth in the country.

Technical View

The day chart above for the FTSE shows a market that is still in a sideways trend. Prices are above the Ichimoku cloud, indicating a bullish trend. However, the range is limited since September 19, between 8,367 (green line) and 8,203 (bottom line blue area).

The market attempted to break out of the tighter range of the blue area and failed. The market found the resistance of 8,367 and retreated back to the cloud. This move confirms the sideways range.

Further confirmation of the lack of momentum comes from the RSI. Which has been hovering around the level of 50 for most of the time since September 09. Today’s candle has found support on the top side of the cloud.

Further support will come within the cloud and at the bottom of the blue area, around 8,203. To the upside the market will meet resistance at 8,367 (green line), which it failed to break already twice.

[[FTSE-graph]]

DAX in Mixed Trading as Market Awaits SAP Earnings – China adds to stimulus

Posted on October 21, 2024 by Gino Bruno D'Alessio

The heavyweight tech company will report earning later today, overnight China cuts its key lending rate by 0.25%.

The cloud and software company accounts for 15% of the [[DAX]] index, so is likely to set the tone for the market. SAP has outperformed the broader stock index this year and is up 53% thanks to expansion in several markets.

The company, however, has also been facing a probe in the USA over price fixing in government contracts. Investors seem to show little concern about it as the possible fine should fall well short of being anywhere near crippling.

China continued to implement stimulus policies and cut its prime lending rate by 25 basis points. The PBoC also extended its loans for buybacks program. Analysts are concerned that the policy will have a short-term effect only.

The scheme involves 20 Chinese listed companies that have announced plans to tap into the government lending program. The PBoC will supply $42 billion in funding to allow firms to prop up share prices through buybacks.

The announcement has had little effect on the DAX, which previously jumped on the news of the first stimulus package on September 26. The local stock market is more concerned with the overall state of the domestic economy and ECB easing as the DAX continues to look bullish.

Technical View

The day chart above for the DAX shows a market in a bullish trend as price continue to surge above the Ichimoku cloud. The current bullish leg is the 5th wave (crimson zigzag) of the Elliot wave system and would seem to still have some room to trend higher.

The last 2 bullish waves peaked at levels (1 and 3) that failed to show extensive momentum. Those highs reverted to lower with the RSI failing to break above 70, an indication that the bull trend lacks strong momentum.

I see the target to the upside testing the 20,000 level, which is a substantial psychological barrier. While to the downside, the market will find support on the previous high of 19,057 (red line).

[[DAX-graph]]

DAX Rallies as Bets on ECB Back-to-Back Rate cuts Mount

Posted on October 18, 2024 by Gino Bruno D'Alessio

The markets sees the first consecutive cut in rates from the ECB in 13 years as the signal for further cuts.

Traders are raising their bets that the central bank will cut rates at an increasing speed compared to other peers. The [[DAX]] touched a new all-time high yesterday of 19,681 and is up 0.2% on the day.

The ECB chief made it very clear at the post meeting press conference that the central bank is data dependent. Referring to the need to keep interest rates as restrictive as long as needed to make sure inflation is under control.

That statement leaves us with a simple task, which is to look at the data. The Eurozone economy is not doing that great, with Germany lagging behind its peers instead of being the traction of Europe.

The weakening GDP outlook and signs that inflation is finally settling under the 2% target are the reasons the ECB has cut rates twice in a row. Looking forward, analysts see a deteriorating GDP growth and continuing declines in inflation.

[[DAX-graph]]

GDP Growth Prospects

The Eurozone GDP Growth is expected to be at 1% for the full year 2024, while ECB analysts see GDP AT 1.2% for 2025. The ECB forecast for 2025 GDP growth states improved consumption demand and higher exports.

For the forecasts to materialize a lot will depend on demand from China and the USA. Today GDP Growth from China YoY Q3 declined slightly to 4.6% from 4.7% at the least reading. While house prices took a plunge, decreasing again by 5.7%.

The house price index is seen as an indicator of the health of the Chinese economy and recent problems in the real estate sector seem to persist despite the recently announced stimulus package.

Eurozone Stocks Get off to a Positive Start Ahead of Today’s ECB Policy Meeting

Posted on October 17, 2024 by Gino Bruno D'Alessio

The main European indices are higher today as the market extends bets on ECB policy action later today.

Investors widely expect the central bank to cut rates by 0.25% today. There may be room for a larger than expected rate cut, and the markets seem to be driven by this sentiment on today’s open.

The ECB’s monetary policy decision will come soon after inflation data for the Eurozone. Inflation is expected to decline, and EU statistics are usually very accurate, so I don’t expect any surprise there.

The YoY inflation rate is expected to fall to 1.8%, well below the 2% target from the CB. While Core inflation YoY is expected to decline slightly to 2.7% from 2.8%. These numbers are already priced into the market, I expect limited volatility after the release.

We will almost certainly get a surge in volatility post interest rate decision, and that should continue once the ECB’s president Lagarde starts speaking at the press conference. The market will be looking for clues on forward guidance.

I expect the chief banker’s stance will be the typical; depending on the data we act accordingly. The market might still get some clues on how severe the ECB believe the economic slowdown may be.

And how fast the inflation rate might decline going forward. These two opinions may also give an idea as to how much more work the central bank has before stabilizing prices. Hopefully, in the process the economy gets a kick-start.

[[DAX-graph]]

DAX Seeking New Highs – CAC Recovers from Lows

The [[DAX]] hit a new high all-time high on Tuesday and retraced lower. Today’s rally on high expectations on the ECB meeting has lifted the index 0.52% on the day. The German stock market is seeking higher highs despite the not so good news from its automakers and the economy in general.

The French stock market has been riddled with political problems. Investors have been concerned about instability in the country since election finalized at the end of July. The outcome of those elections was a hung parliament.

The [[CAC]] however, is up 0.98% on the day, outperforming its German peer by 0.46% on the day. If todays rally holds, it would make a two-day rally and lead the index away from recent lows.

FTSE Remains Range Bound, Inflation Data Lower than Expected

Posted on October 16, 2024October 16, 2024 by Gino Bruno D'Alessio

FTSE rebounds from yesterday’s lows and pound drops as inflation falls below the BoE 2% target after 3 ½ years.

UK stocks kicked off to a positive start today, with [[FTSE]] gaining 0.85% after YoY inflations fell to 1.7% from 2.2% last Month. The [[GBP/USD]] lost 0.57% as the pound weakened on lower UK interest rate sentiment.

Today’s data also showed a drop in MoM inflation to 0.0% from 0.3% last month. And Core Inflation YoY also printed a sharp decline to 3.2% from 3.6% previously. The weak inflation data opens the door for interest rate cuts at the next MPC meeting on November 7.

A poll from Reuters before this data was published showed that 75% of economists surveyed believed that the BoE would cut rates once before the year end. It looks like the chance of a rate cut are getting higher with this data.

The dovish sentiment on the BoE monetary policy is also boosted by the same view for policy action from the ECB. The Eurozone’s central bank is seen as very likely to cut rates at its next meeting tomorrow.

Today’s largest movers sees Whitbread (WTB) leading the FTSE higher, up 4.36% on the day. To the downside, Admiral Group (ADML) is losing 3.21% on the day.

Technical View

The day chart above for the FTSE shows a market that is still range bound. The sideways trend has been ongoing since September 20, as we can see from the blue rectangle. Most of the price action has been limited by the up resistance of 8,320 and the lower support of 8.203.

The sideways trend, or lack of clear momentum, is also indicated by the RSI, which has also fluctuated in a range between 44 and 55. The numbers for the RSI that are close to the level of 50 indicate the market is without sentiment.

Today’s support is at the top of the blue rectangle at 8,320, and the market will find support at the bottom of the rectangle at 8,203. A clear close above or below the rectangle should give rise to the next major move.

That said, the market will also find major support from the cloud if it does break below the rectangle. Another bullish factor is that the market is above the Ichimoku cloud, and technically in a bullish trend.

DAX Sets New All-Time High – Metro Tokyo to Launch IPO

Posted on October 15, 2024 by Gino Bruno D'Alessio

The German stock index set 2 back-to back-new ATHs following the lead from US stocks. The launch of publicly owned Metro Tokyo IPO is the largest in Japan for 6 years.

The [[DAX]] reached 19,554 yesterday and 19,642 today, printing 2 new all-time highs in a row as market sentiment shifts to fast action from central banks. Investors are perceiving that the ECB will cut rates on October 17 at this week’s meeting.

The sentiment following various statements by ECB officials and other national central bankers is that it won’t be the last. The European economy is struggling, and Germany, the Eurozone’s largest economy, is expected to experience a mild recession.

The ECB will have no choice but to cut rates in quick succession. Another factor that plays into the monetary loosening is the speed at which the Fed will act on interest rates. US Stocks have also benefitted from the perception of lower rates and sooner.

The [[DOW]] has posted 3 successive ATHs, gaining 1.62% in the past 2 sessions. The schedule on interest rate cuts from the Fed will offer the ECB an easier route to rate cuts. The euro FX rate could suffer and create imported inflation without concurrent action from the US central bank.

Metro Tokyo IPO

The Japanese government and the City of Tokyo have announced the IPO of Metro Tokyo for October 23. The national and local governments own 53.4% and 46.6% of the subway operator, and is expected to fix the IPO price at 1,200 yen per share.

The IPO is expected to collect ¥348.6 billion ($2.3 billion) at the offering price. The share price is expected to give a dividend yield of 3.3% per fiscal year, which ends in March 2025. The [[NIKKEI225]] is down 0.99% on the day as the index struggles to follow its US peers to new highs.

Investors are faced with the specter of higher interest rates as the BoJ sets course for policy normalization. Recent comments from the Prime Minister, Shigeru Ishiba have highlighted the need for prudence.

The market has had some reprieve from those comments; however, sentiment is still focused on how well the economy can perform as the BoJ tightens monetary policy.

DAX: Bloomberg Sees Mild Recession in Europe’s Largest Economy from Low GDP Growth and Output

Posted on October 14, 2024 by Gino Bruno D'Alessio

Bloomberg reported today their survey of economists for the German economy at flat for 2024.

The consensus for 2025 is a mild recovery after the economy dips into a mild recession in Q3 and Q4 2024.

The [[DAX]] opened with another rally today, but so far has failed to print a new all-time high. The market is set for a week of high-profile events. The main one being the ECB policy meeting on October 17.

The market now widely expects the central bank to cut rates again by 0.25%, for back-to-back easing of 0.50%. The question remains as whether the monetary loosening is coming too late.

The China stimulus package, which initially sparked a lot of high hopes in stimulating internal demand for German seems to have dissipated. The market is more focused on revived internal demand and ECB policy.

Also on October 17, we have Inflation data for the Eurozone a few hours before the ECB meeting. Analysts expect a sharp decline from 2.2% to 1.8% for the broad inflation index. While they only expect Core Inflation to fall to 2.7% from 2.8% last month.

[[DAX-graph]]

ECB Policy

Presumably even a small drop in inflation will be sufficient for the ECB to stay on track for further cuts. Central bank officials have spoken on various occasions of the stagnation in the Eurozone economy.

The various statements have given rise to the high expectations for a cut in their next meeting. The exercise many analysts are making now, is gauging just how low the central bank’s interest rates will go.

The next meeting in January is when the market expects the next cut to take place. And if forecasts for the Eurozone economy are on target that cut in January is highly unlikely the last. Until recently, most economist saw the bottom of the loosening cycle at 2%-2.25%.

BofA has recently issued a report where they see the terminal interest rate for the ECB at 1.5% at best. Citing that before the pandemic the central bank maintained a neutral rate that was even lower.

CAC French Stocks Markets Ease as Fitch Downgrades Outlook

Posted on October 14, 2024 by Gino Bruno D'Alessio

The credit rating company lowered the outlook for France from stable to negative, while the government bond rating remains AA-.

The rating agency cited a deteriorating outlook for the country’s public finances. Tax revenue has been smaller than expected and government spending has exceeded it creating fiscal slippage. Fitch expects national debt to increase significantly through 2028, reaching 118% of GDP.

The recently approved budget is also a reason of concern. The national assembly approved a plan to increase taxes on the richest and large corporates and cut spending. However, the rating agency is doubtful that the government will be able to deliver on its promise to close the fiscal gap.

Fitch also pointed to the fragmented political scenario in the French national assembly. Expressing concerns as to whether the newly formed government will be able to legislate. The numbers needed to form a majority will oblige them to join forces with one of the political parties at the extremes of the political spectrum.

The [[CAC]] is underperforming today, down 0.22%, compared to its peer the [[DAX]] which has rallied 0.34% on the day.

Technical View

The day chart above for the CAC shows a market undergoing a bullish leg as it attempts to break above the Ichimoku cloud. The last 13 candles have traded above the cloud, but we can see the lagging line (yellow line) is still to break above the cloud.

For confirmation of a bull market, we need to see that lagging line also above the cloud. So far, the market has given indications of strength, its last retracement from the recent high of 7,804 (grey line) bounced off the cloud.

The previous retracement found support on a previous dip and rallied higher. Simply put, we can see a series of higher highs and lows indicating a bullish trend. The next major resistance level is at 7,804.

To the downside, the market will find support on the cloud, and immediately below it at 7,339 (black line), which coincides with support from 3 dips to that level.

[[CAC-graph]]