The Japanese stock market made large gains starting from the end of 2012, but concerns over geopolitical risk in Ukraine and potential debt default in Argentina led to market sentiment weakening from the beginning of 2014.
A confluence of factors worked against the Australian market during the month. Regulatory concerns in the banking sector, lower commodity prices and a weaker Australian dollar were the key drivers of the market’s underperformance.
Much as we expected, China’s economy has continued to slow faster than consensus, but does not appear to be in a hard landing.
In the Australian credit market, the relative lack of supply compared with demand continues to cause spreads to tighten in the physical market offsetting the risks of an unstable geopolitical environment.
Reasons for the recent weakness in the AUD include a fall in the iron ore price, the rally in the US dollar, weaker Chinese data, and indications that the Reserve Bank of Australia is considering macroprudential controls.
Improving the number of independent directors and other governance issues are very important in the intermediate term for Japan, but it is crucial for investors to understand that much of the profitability message has already been understood by Japanese corporate for nearly a decade.
Japan’s pipeline inflation, which we measure using the recently renamed Producer Price Index’s Finished Consumer Goods for Domestic Demand sub-component continued to be quite depressed in August.
Japan’s 2Q GDP growth, at -7.1% QoQ SAAR, was far below June’s consensus of -3.1% (and our -2.5% estimate) and we need to reduce our CY14 forecast, but not by much and we remain more optimistic than consensus.
Although not a Goldilocks scenario, our forecasted macro-backdrop is quite positive for global equities.
G-3 bond yields rose less than we predicted, mostly due to continued ECB aggressiveness, worries about the Chinese economy and the decline in oil prices.