Japanese Shares Reach 30-Year Highs on Strong Earnings and Offshore Demand
Japanese shares surged to levels not seen in 30 years on Monday, driven by strong earnings and offshore demand. The Nikkei index experienced a three-week winning streak, propelled by financial shares and auto makers. The market’s growth is fueled by investor anticipation of an eventual end to negative interest rates and the benefits of a weak yen and high exports. The Topix index closely follows the Nikkei’s upward trajectory.
Meanwhile, other Asian markets also saw gains, with MSCI’s broadest index of Asia-Pacific shares outside Japan climbing to a two-month high. The Chinese economy stayed steady as its central bank maintained rates as expected, but it set a firm fix for the yuan, leading to a slight decline in the dollar. However, Chinese blue chips dipped slightly by 0.2%.
Looking ahead, investors will be monitoring the consumer-driven U.S. economy during the Black Friday sales. The Thanksgiving holiday, however, may result in thinner trading volumes. Reports have emerged of a potential agreement between Israel, the United States, and Hamas to release hostages in Gaza, although no confirmation has been received yet.
Analysts at Goldman Sachs noted the outstanding performance of the Magnificent 7 mega-cap stocks, which have returned 73% so far this year compared to just 6% for the other 493 firms. The analysts expect these tech giants to continue outperforming their peers due to their expected sales growth, margins, re-investment ratios, and strong balance sheets. However, they caution that the risk/reward profile may not be particularly compelling given elevated expectations.
Tech major Nvidia is set to report its quarterly results on Tuesday, with market focus on the demand for its AI-related products. U.S. economic data is expected to slow down this week, but the release of the Federal Reserve’s minutes from its last meeting will provide insights into policymakers’ thinking as they maintained rates for a second time.
The market has largely discounted the possibility of a further rate hike in December or next year. It now implies a 30% chance of easing starting in March. The futures market also indicates around 100 basis points of cuts for 2024, up from 77 basis points before the benign October inflation report. These expectations have contributed to a rally in bonds, with 10-year Treasury yields dropping and the U.S. dollar weakening against a basket of currencies. The euro strengthened, and the dollar experienced a decline against the yen.
In the European markets, surveys on manufacturing activity are eagerly anticipated, particularly given recent signs of deterioration in the Euro area’s services sector. Any weakness in the surveys could push market participants to further price in early rate cuts from the European Central Bank. Currently, markets are implying around a 70% chance of easing as early as April, despite some ECB officials emphasizing the need to keep policy tight.
This week, Sweden’s central bank also meets and is expected to hike rates again due to high inflation and the weakness of the country’s currency.
In the commodities market, oil rebounded from four-month lows on speculation that OPEC+ will extend or increase production cuts into next year. Brent crude added to its price, as did U.S. crude. Gold remained slightly firmer, having experienced a 2.2% increase last week.
Overall, the Japanese stock market’s resurgence to 30-year highs reflects the strong earnings and offshore demand that have propelled its growth. As investors prepare for a possible end to negative interest rates, financial shares and auto makers continue to lead the gains. However, analysts caution that while mega-cap tech stocks may continue to outperform, elevated expectations suggest a less compelling risk/reward profile. As markets await key economic data releases, including the Federal Reserve’s minutes and European manufacturing surveys, there is speculation about the potential for rate cuts and further monetary policy actions by central banks around the world.
