Last week saw a substantial correction in equity markets, particularly in Japan. Although according to several press comments, this was caused by slightly weaker than expected unofficial Chinese PMI data, we remain sceptical. Instead, we regard the downturn as a reaction to current market positions following several months of rising equity prices both in Japan and elsewhere, in response to increased asset purchases by central banks, particularly since the BOJ launched its unprecedented new monetary strategy to reflate the Japanese economy. Between November last year, when Abe announced details of the various initiates involved, and immediately prior to last week’s correction the Nikkei surged by over 80% on expectations of large scale bond purchases and the positive effects on corporate earnings of JPY depreciation. Probably a more substantial adjustment such as occurred last week was unevitable. Nevertheless, we would suggest most emphatically that the correction was probably more a response to Bernanke’s testimony before Congress concerning the increasingly positive US economic outlook, which markets interpreted as meaning that the Fed could start scaling back purchases at some point during the next few meetings. While the prepared note was as dovish as we had expected, several of Bernanke’s comments at the Q&A session were interpreted hawkishly by markets generally.
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