Capital Markets: "Politics Overshadows Economics Today, but Japan's Economy Unexpectedly Expanded in Q1"

From Marc to Market:

Overview: Encouraged by the election results, investors bid up Indian and Australian currencies and equities. Japan offered a pleasant surprise by reporting the world's third-largest economy expanded in Q1. Most other equity markets in Asia fell, and European stocks have the week with small losses. The US decision to isolate Huawei sent ripples through the suppliers and customers. OPEC+ indicated supplies may remain tight and oil prices opened firmer and are seeing early gains of 1% pared. Global benchmark 10-year yields are higher. Core yields are around two basis points firmer, while the periphery is lagging, and Italian bonds are bucking the move. The US dollar is trading heavily against most of the major and emerging market currencies. The yuan posted small gains. Sterling is trying to end its record-long 10-day slide against the euro.

Asia Pacific
Polls showed a tight race in Australia, and when the dust settled, the governing Liberal-National coalition won re-election, securing a majority in parliament. The campaign pushed back against the progressive agenda of Labor that had focused on the environment and higher taxes on the wealthy. Prime Minister Morrison intends on pushing through tax cuts quickly. The Australian stock market, already at record highs, surged nearly 1.8%. It was the fourth day of advances, and the gain was almost as large as the previous three sessions put together.

There had been nearly universal agreement that the Japanese economy shrank in Q1. Instead, the government reported that the economy grew 0.5% and 2.1% at an annualized. The surprise seemed to stem from the fact the business investment did not contract nearly as much as had been expected. Business investment fell 0.3%. Economists had expected the decline was closer to 2%. Consumption fell 0.1%. The net export function also contributed to growth, not because exports were strong, but because imports were weak. Although the capital expenditures are subject to revision, the positive growth, even if of weak quality, may be sufficient to silence the talk of a delay in the sales tax. Note that there continues to be speculation that Abe will dissolve the lower chamber and plan for joint elections in July.

What began off a security breach for Huawei (breaking the US embargo against Iran) and one that President Trump was at one point willing to wrap up into a trade agreement, now has turned into an existential exercise. The US will ban most sales to and purchases from Huawei. This includes semiconductor chips, software updates (Android), and the app stores. Reports indicate that some non-US chip makers will participate. Huawei is thought to have been preparing for this eventuality and has stockpiled chips. We anticipate two strategic responses. First, China will seek to rapidly develop its own semiconductor production capacity. Second, there had been reports suggesting that Huawei has developed its own mobile operating system. Currently, the US had a duopoly between Android and OIS....

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