Our tactical view has been cautious for a few weeks (our strategic view has been cautious for some time), but we are now detecting signs that US markets in particular are getting a bit oversold and short-term sentiment measures are dipping into oversold territory.
The chart below shows the Nasdaq 100 Index on a weekly basis and we have highlighted the support area near 2,440 created by the highs from 2011 and the low from summer 2012. The correction over the past few weeks has wiped more than 13% off the index and we expect the market to stabilise ahead of the 2,440 support area. We therefore adopted a bullish position in the Nasdaq on Friday looking for a bounce in the next few weeks.
There is clearly upside potential for US equities if Washington moves to a sensible fiscal plan in the days/weeks ahead, and with the next Fed meeting on 12 December, we believe it makes sense to be thinking more positively on US equity markets in the short term.
Political developments in Japan have helped the Japanese yen weaken markedly last week. The point we want to make here is that an election has been called and the opposition, who are handily ahead in the polls, should win.
Their policy is to weaken the yen dramatically with the help of the Bank of Japan and their aim is to generate inflation of 2% to 3%. We have to expect that they do not wish to see the currency weaken by only a few per cent as this will have no effect on their economy. Frankly, it has to weaken substantially over time – perhaps to 100:the dollar and beyond.
We believe that the tide has changed here and we expect a prolonged period of yen weakness so we have FX trades in place to take advantage of this potential. We also invested in the Japanese equity market last week as we expect a substantial rally if the currency does weaken. We have of course hedged the FX exposure that this equity investment creates.
The chart below show the Japanese currency over the past few years (note a higher price relates to dollar strength and yen weakness), and we have marked the potential pattern of a higher low being created this autumn compared to a year ago.
The bullish dollar and bearish Yen technical pattern will be greatly enhanced if the rate moves above the 84 level that was seen earlier this year. We are very optimistic that this will occur soon, and we are bullish of Japanese equities and bearish of the yen in anticipation of a sustained period of yen weakness.
US equities have now fallen sufficiently for us to adopt a tactical bullish position via the Nasdaq. We suspect that a year-end bounce will develop soon, and we wish to get ahead of the curve for this potential. That said, the theme we have the most confidence in is the weak yen theme which can be implemented by being bullish of Japanese equities (currency hedged) and bearish of the yen versus the dollar.