A quiet start to the week in Asian markets as the Lunar New Year celebrations dampen trading activity. The region's shares, which had been on a roll, consolidated their gains, but the mood was subdued. The holiday season and some disappointing economic news from Japan took some of the shine off the recent boom.
But here's where it gets interesting...
Japan's economy, a key player in the region, grew a meagre 0.2% in the December quarter, falling well short of expectations. This has raised concerns and highlighted the challenges faced by the country's new Prime Minister, Sanae Takaichi. The underwhelming figures could strengthen her case for implementing more aggressive fiscal stimulus measures.
While some markets, like Japan's Nikkei, managed to edge up slightly, others remained closed due to the holiday. This included China, South Korea, and Taiwan, which left currencies and bonds relatively unchanged. However, precious metals faced renewed pressure.
And this is the part most people miss...
The tech-heavy markets of South Korea and Taiwan saw impressive gains last week, with Korea surging 8.2% and Taiwan climbing almost 6%. But there's a catch. Some analysts are expressing caution about the exceptional performance of memory stocks in these markets. Nick Ferres, chief investment officer at Vantage Point, warns that a pause in capital expenditure by mega-cap technology companies could lead to a sharp correction in these stocks.
As we look ahead, the major data releases of the week are yet to come, with global manufacturing surveys and the U.S. GDP report for the fourth quarter due on Friday. Median forecasts predict annualised growth of 3.0%, a drop from the previous quarter but still considered solid.
A controversial interpretation...
The increase in capital expenditure by companies has led to a decrease in buybacks, with S&P 500 buybacks dropping by 7% from a year ago. This raises the question: Is this a sign of companies prioritizing investment over returning cash to shareholders? Analysts at Goldman Sachs suggest that the scarcity of free cash flow could strengthen the focus on companies that prioritize shareholder returns.
In other news, bond markets are seeing an influx of cash as investors shift away from stocks, and U.S. economic data supports the case for further rate cuts by the Federal Reserve. The yield on two-year Treasuries fell to 3.408% on Friday, the lowest close since mid-2022. This has implications for the dollar, which weakened against major currencies last week, particularly the Japanese yen.
A potential intervention?
The relentless rise of the Swiss franc has markets on edge, with inflation already at 0.1%, close to the lower end of the Swiss National Bank's target band. This could prompt the bank to intervene to stabilize the currency.
In commodity markets, gold and silver prices took a hit, with gold sliding to $4,973 an ounce. Oil prices remained steady as investors considered the possibility of OPEC resuming oil output increases from April.
So, what do you think? Are the recent gains in Asian markets sustainable, or is a correction on the horizon? Share your thoughts in the comments below!
