S&P 500 Set for Fresh Highs as Japanese Stimulus Bets Prod Stocks

2016-07-11 13:10:00

Talking Points:

- Japanese Prime Minister, Shinzo Abe, had a big win over the weekend as his conservative coalition appears to be set to take a super majority in the upper house of Japanese parliament. This means that we’ll likely see lessened resistance to Japanese constitutional reforms and further economic stimulus.

- This has brought on a global effect, with many global equity markets trading higher on the back of even more stimulus from the world’s third-largest national economy.

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Abe Set for a Big Win in Weekend Elections: Japanese Prime Minister Shinzo Abe had a big win this weekend, as his conservative coalition looks to have won a super-majority in the upper house of parliament. This means that Abe will likely be able to push ahead with Constitutional reforms while facing fewer encumbrances to passing even more enhanced stimulus. Abe had previously pledged that a ‘comprehensive, bold economic stimulus package’ was coming this fall, and this weekend’s win gave that a higher probability of actually happening.

The near-term impact has been very similar to the Abe-nomics run from 2012-2015, in which the Nikkei rockets higher while the Yen sells-off. But the impact hasn’t been limited to just Japanese assets, as this higher probability of even more stimulus coming out of Japan has helped to propel global equities as the S&P 500 works on a fresh all-time high.

This is the type of theme that could potentially have near-term staying power unless even more aggressive risk aversion takes hold (such as being triggered by more fears around Brexit, China, etc.). As investors begin anticipating even more stimulus coming out of Japan, we’ll likely see markets attempting to front-run the trade, which means we could get the impacts of stimulus (Yen weakness, Nikkei strength) without or before any actual stimulus itself.

Given that Central Banks have become one of the strongest drivers across global financial markets; and also given their near unanimous quest for transparency, the prospect of continuing to front-run Central Bank actions appears to be alive and well. On the chart below, we’re looking at the quick one-day burst of weakness in the Yen against the US Dollar; and below that we’re taking a look at the Nikkei setting a new short-term high on the back of this weekend’s news.

Created with Marketscope/Trading Station II; prepared by James Stanley

The Nikkei has set a fresh-high after breaking through price action resistance in the ~15,800 range. Traders would still want to be cautious towards chasing too quickly; instead waiting for ‘higher-low’ support to develop around a prior level of resistance.

Created with Marketscope/Trading Station II; prepared by James Stanley

SPX 500 Set for Fresh All-Time High: The feel-good euphoria in stocks has not been relegated to Asia. Given that Japanese stimulus had previously entailed purchasing stocks around-the-world, the prospect of even more stimulus out of the country can be seen as a bullish factor for international equities. And while this has been a costly endeavor, Japan’s anticipated commitment and signals of upcoming stimulus show that they likely won’t be deterred by challenges or failures seen previously.

On the chart below, we’re looking at the quick burst of strength seen in SPX500 last night to set that new all-time high (previous high denoted by the orange line). The aqua line just above the prior all-time high is a 61.8% Fibonacci extension of the Financial Collapse move, taking the top in October of 2007 down to the lows seen in March 2009. The level that is 161.8% away from that move comes-in right at 2,138.54.

Created with Marketscope/Trading Station II; prepared by James Stanley

GBP/JPY Likely to be especially volatile this week: Thursday brings us the Bank of England’s next rate decision, and expectations are already beginning to line-up for a rate cut out of the U.K. fairly soon. Bank of England Governor, Mark Carney, had previously mentioned that a rate cut would likely be coming this summer in the effort of proactively countering risks emanating from Brexit. The big question is whether this cut was going to take place in July or in August, when the Bank also releases forecasts and economic projections (aka, Super Thursday). Making a move on rates at a meeting in which the bank does not also issue forecasts and projections would be somewhat against the norm, but if the three public appearances from BOE head Mr. Carney since the Brexit referendum are any indication, the bank is seeing the current environment as being exceptional. So a rate cut on Thursday is very much on-the-table, although it may make more sense for the bank to wait until August to a) get more post-Brexit data in order to more accurately gauge impact and b) to accompany that rate cut with supporting materials regarding the bank’s outlook for the U.K. economy (projections).

But if we combine this with the first theme discussed today, the prospect of even more Japanese stimulus; this could make GBP/JPY especially volatile in the week ahead. On the chart below, we can see that quick burst of Yen weakness rallying GBP/JPY into resistance at the ‘Brexit lows.’ Be careful if trading in GBP/JPY this week, as there are fundamental drivers on both sides of the pair that can create quick, sharp and volatile price movements at a moment’s notice.