Believe it or not, the main driver of risk overnight had nothing to do with Iraq, with the global economy or even with hopes for more liquidity, and everything to do with a largely meaningless component of Japan’s future tax policy, namely whether or not Abe (who at this pace of soaring imported inflation and plunging wages won’t have to worry much about 2015 as he won’t be PM then) should cut the corporate tax rate in 2015. As Bloomberg reported, Abe, speaking to reporters in Tokyo today after a meeting with Finance Minister Taro Aso and Economy Minister Akira Amari, said the plan would bring the rate under 30 percent in a few years. He said alternative revenue will be secured for the move, which requires approval from the Diet.
The following sentence demonstrates vividly the clusterfuck Japan and its contradictory policies have become: “A lower levy is the centerpiece of Abe’s latest initiative to boost growth, now the main focus with the Bank of Japan keeping its policy unchanged. Failure to find extra funds to offset the blow to revenue risks worsening the world’s largest debt burden.” So cut taxes to boost revenues, got it? Even the Japanese are starting to laugh at their Imodium-full Keynesian idol:
“Cutting corporate tax is a move in the right direction but it won’t necessarily trigger economic growth,†said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. “It is absolutely necessary to secure alternative tax revenue as the government’s finances are deteriorating.â€
Idiocy aside, this corporate tax debate activated the USDJPY 102.000 tractor beam and after dropping as low as 101.60 during the US session, the pair rose as high as 102.9, dragging US equity futures and Asian stocks with it.
And just in case this particular piece of absolutely irrelevant for global markets data was insufficient to push stocks higher, Japan also continued, for the nth time, to disclose that it would force its pension fund to sell JGBs and buy high beta stocks. This helped the Nikkei, and also added to the USDJPY thrust (because apparently this was not priced in the first few hundred times it was revealed) and also was seen as sufficiently offseting the soaring geopolitical risk in Ukraine and, of course, Iraq, where things are getting from bad to worse.
Because when a mutant butterfly flaps its wings in Fukushima, global stocks rise.
However, the Asian bounce appears short lived: as Europe woke up, sentiment remained driven by the recent escalation of geopolitical tensions in Iraq, which in turn resulted in stocks trading lower since the get-go. In terms of stock specific movers, UK home-builders were under particular selling pressure in reaction to the UK Chancellor Osborne’s move to give the BoE powers to cap mortgage lending ratios and also hawkish comments by BoE’s Carney. Oh yeah, Goldman’s BOE head warned that the UK may raise rates sooner than expected. Don’t hold your breath on this particular instance of busted forward guidance either.
Crude continues to surge on concerns the Iraq situation will deteriorate even further. As DB reported overnight, if ISIL is able to make southward progress towards Baghdad this will heighten instability in the country and possibly threaten the smooth operation of existing refineries and oilfields. Of most concern would be any detrimental impact on investment in new capacity. From a global oil perspective our commodities team expect the latest events in Iraq will sustain strong fundamentals for Brent crude oil. DB concludes that we may be witnessing the start of a more divergent supply picture between Brent on the one hand and WTI on the other.
