Markets expecting too much support - Westpac

Martina Song, Research Analyst at Westpac, suggests that this week risk sentiment improved, sparked by expectations of further easing out of Japan.

Key Quotes

“PM Abe’s ruling coalition won the upper house elections in landslide victory on Sunday. While the details of the stimulus package, including the amount, have not been announced, markets have been expecting the elections results to give Abenomics freer rein. This has been enough to see USD/JPY bouncing to 105 and the Nikkei up 8.5% since Friday close.

A dovish tilt from president Draghi at next week’s ECB meeting is possible too. Markets will be watching for any “pre-announcement” of further measures to be taken in the Sep meeting, such as an indication of an extension of the QE program. The Bank of England is also looking likely to cut rates and restart QE with a clear preparedness to ease further.

Recent US data – payrolls and ISM surveys - have been strong. As Rich notes though, with Fed hike expectations still low, this has boosted risk assets though not USD. This week we have seen the S&P500 make fresh records, while US10yr yields have bounced off record lows.

We are wary though as the above story could change quite quickly. Any Japanese government/BoJ stimulus could very well disappoint, especially given recent headlines on “helicopter money” and perpetual bonds.

In the UK, there had been some talk about the possibility of another referendum or a snap election. Parliament is also set to debate the EU referendum petition on a second referendum Sep 5. With new UK PM May filling her cabinet with three leave campaigners however, we could see Brexit risks reignite on a commitment to leave. Risk appetite though is not yet at extreme levels, which should provide some insulation for risk assets.”