Forex Marketz Daily Forex News – Fully Markets Update
The Nikkei, Japan’s benchmark stock index has been on one big rally since the Bank of Japan (BOJ) brought out the big guns to provide fresh support for their flagging economy. Today, the Nikkei was above 17,000 for the first time in seven years.
Now here are the big questions: “Is this a sustainable rally?” “Will this rally stall after the short term joy comes to an end?”
The Nikkei jumped to 17,028 today. This was a 3.8 percent gain before ending today’s trading at 16,976.41. This extending the 4.8 percent rally seen since Friday. Yesterday was a national holiday, and Japan’s financial markets were closed.
This rally is not a big deal for right now. As far as looking at this from a risk standpoint, we are standing knee deep in a sea of change. The government pension fund, the largest in the world, is going to buy more equities and they are cutting back on bond purchases. The markets are following them. After the BOJ announcement on Friday, the country’s largest pension fund unveiled their new strategy, to buy more equities and less bonds. They are increasing their exposure to riskier assets.
Under their new plan, stocks will comprise one quarter, 25 percent of the pension fund’s holdings. This is up from the previous allocation of 12 percent. They will put 35 percent of their funds into Japanese Government Bonds (JGB), down from 60 percent. Overseas bonds will increase to 15 percent of their holdings. This is up from 11 percent.
Does this stock market rally have “legs?” Maybe. Japan started this structural rally, a bull market back in mid-2012 and we are not even half way done. The key drivers of this current rally are prow growth policies from the BOJ and Prime Minister Shinzo Abe, strong under valuations and solid earnings momentum. We also have company management focusing on returns for shareholders. Japan is now the only country in which earnings exceeds analyst’s expectations.
In a recent survey conducted by Nomura Securities, of the 201 companies, on the Nikkei, which reported quarterly results, 79 exceeded earnings expectations, and profits forecasts, on October 31 by more than ten percent. Forty companies were below ten percent.
If you take all of these factors into considerations, the stocks on the Nikkei not only become a trade but are now a long term investment.
But is this really enough to sustain this rally? Probably not.
This current rally could be investors rotating back into stocks and other interest rate sensitive financial instruments, like financials and real estate companies. If this is the case then the current gains are not sustainable, and the rate of growth is going to slow down. This rally could be about traders in big hedge funds quickly positioning themselves.
