It is easier for asset purchases to boost asset prices than the real economy. The widening disconnect between market metrics and macroeconomic data may be justified through the wealth effect argument. But as we have seen in winter-spring 2007, equities lagged behind the economy, rather the inverse. And unlike in 2007, today’s market dynamics lack the anomalies of debt-fuelled real-estate markets and sky-high commodities prices. And even if 92% of shares in the S&P 500 trade above their 200-day moving average, this remains well below the 96%-97% highs seen in 2009 and 2011.
It has been claimed by a few macro hedge fund managers that the latest yen sell-off was being used by funds’ to absorb losses in April’s gold damage. But there is another angle. Yield-searching Japanese investors gradually are shifting from “sell yen/buy gold” to “sell yen/buy global equities/buy U.S. treasuries.” As Japanese investors continue to exit their gold longs, the proceeds are likely to remain overseas, supporting equities and sovereign bonds.
As USD/JPY enters the next phase of its rally (alongside EUR/JPY and GBP/JPY), the Japanese upper house elections due in July likely will be the catalyst for Abe to exercise a rare majority in both houses of the Diet and further grease the wheels of his reflationary policy. The next major destination for the pair remains 108 as long as the November trendline support remains intact, which means no weekly close below 97.70.
Ashraf Laidi is chief global strategist at City Index-FX Solutions and author of “Currency Trading & Intermarket Analysis.” His Intermarket Insight appears daily on AshrafLaidi.com.