Dollar And Equities Find Firmer Footing

As the 24-hour session has progressed, the US dollar and equities have stabilized and turned higher. Indeed as US traders prepare to return, stocks and the dollars are trading near session highs. Oil prices are also trading higher. Core bonds are a bit heavier, and the US 10-year yield has moved back above 2.10%. News that Libya declared force majeure at two of its oil terminals appeared to have turned the oil market around. It had continued to fall in the early hours the UAE warned it was prepared for oil prices to slump to $40 a barrel. 

In early Asia, it had looked as if the market was going to pick-up where it left off last week. The dollar fell to JPY117.80.  The Nikkei gapped lower and slipped through last week’s lows. It recovered though still finished 1.6% lower and just below the opening level.  

The record low turnout (~53.3%) in the Japanese elections tarnishes the victory of the LDP/Komeito coalition, which held on to its super-majority. The LDP itself appears to have lost a few seats. The main opposition party DPJ gained 11 seats, but its leader Knieda lost his seat.  Abe’s public support is below 50. The low turnout and the fact that the Communist Party doubled the number of seats (to 21) must be seen as a sign of dissatisfaction. 

If our assessment is correct, the key to Abe’s agenda is the constellation of forces within the LDP itself.  Abe’s reforms are likely to harm the interests of various traditional supporters of the LDP, including agriculture and manufacturers. The cabinet represents the different stakeholders in the LDP. The early indications of the direction of Abe’s second (really his third) term may be seen in changes to the cabinet. Early media reports suggest no cabinet reshuffle is likely. This does not bode well for the third arrow of structural reforms.  

Japan also reported its Q4 Tankan Survey. The key takeaway is that sentiment deteriorated, but spending plans accelerated. Sentiment of the large manufacturers slipped to 12 from 13. The consensus was for no change. Their outlook for March also deteriorated (to 9 from 13). Sentiment and outlook of the large non-manufacturers improved.  It was mixed among the small businesses. Capex plans, however, increased to 8.9% from 8.6%.  The consensus anticipated a decline to 8.1%.