Well, first let me say Japan slipping back into recession does not appear (at the moment) to be a major upset for the market.
- Japan unexpectedly sank into a recession last quarter as the world’s third-largest economy struggled to shake off the impact of an April sales-tax boost
I find the market movement today quite interesting, as the above, coupled with China’s economic slowdown and the flat growth in Europe, would seem to be a downer for the market. Well, it has been in the past anyway. So what gives?
Well, as always, there are the headlines and there are the realities deeper in the story. True, Japan slipped back into recession, but it does not mean a trend has been set. The fact is that Prime Minister Shinzo Abe brought the Japanese economy out of recession in 2012 with policies that drove up government spending.
This year, he implemented a sales tax boost (from 5% to 8%) to help with the problem of too much government debt. That sales tax increase is reputed to be the reason the economy is faltering; yet, what effect did the sales tax increase really have on the economy? It certainly did not seem to slow down consumers.
- While exports and consumer spending returned to gains last quarter, they weren’t strong enough to offset the impact of a slump in the stocks of unsold goods — a sign that companies were unwilling to boost production.
And there you have it – GDP fell because companies are not yet convinced that the sales tax increase is not a problem. Perhaps, then, the market sees this – next quarter, once Japanese businesses see the Japanese consumer is still in the game, then they will boost production to refill the declining inventory. Perhaps it is that simple.
In any case, the simplicity of my thinking brings me to a quote that is worth repeating as, after all, TraderPlanet.com is dedicated to education.
- Simply, the market is not as complex as many make it out to be and it is not as simple as working a logical formula. It is somewhere between. The trick is not to over analyze, to stick with the fundamentals, to understand the macro picture, and, most of all, to go with the flow, up or down.
Yes, the trend is your friend, so keep your eye on that ball, as today’s market movement is just one more market trend indicator. It wants to go up, even if there is a brewing discussion now about the problems associated with the fall in oil prices.
- Research by BNP Paribas published this week found energy exporting countries are set to pull more money out of world markets than they put in for the first time in almost two decades.
Given that the oil producing countries are some of the biggest players in the market, it is no wonder some might jump to the conclusion that their withdrawal of money from the market is a bad sign. Here is why.
- This, BNP said, amounts to less liquidity in financial markets — effectively less money chasing assets and propping up prices which, in turn, potentially means a higher cost of capital, weaker market prices, and higher interest rates.
- According to U.S. government data, members of the oil exporters club OPEC are the fourth largest foreign owner of U.S. Treasury bonds, holding $268 billion, which makes them a key pillar of demand.
Yet, and again, there is always more to the story. In fact, OPEC countries are pulling dough from the market, but, perhaps, that is not going to be a problem for interest rates.
- However, some investors argue that a meaningful impact on asset prices from a withdrawal of liquidity related to falling oil prices is not imminent, partly because central banks can compensate with stimulus measures, at least for now.
Yes, the above withdrawal of money from the market is a worry for some investors, and maybe the market will see price action relative to this down the road, but not today. The trend is your friend.
Trade in the day; invest in your life …
