TOPIX Core 30 outlook and key points

- "The TOPIX Core 30 briefly fell to 441 on 1 September before subsequently rebounding. Concerns about a further downturn spread when the index broke through the November 2009 low of 457, but ultimately it did not fall that much, indicating that investor pessimism may have peaked. With the wave count pointing to a consolidation phase ahead of the next rally, we think the index will lack direction until around Oct–Nov, when the next nearterm (four-month) cyclical bottom is due. However, we think there is greater potential for a rally now that forex intervention by the government and BOJ has brought yen appreciation to a halt. Whereas defensive stocks have outperformed since April, the charts have started to point to a turnaround for economy-sensitive and export-related stocks. As such, we think investors would do well to gear themselves for a change in market trends."

• "Defensive stocks in the ascendancy since April, but this may change: Defensive stocks have been in the ascendancy since April, but we are gradually starting to see signs of change. For example, Kansai Electric Power [9503] posted a new high for the year in September, bucking the downturn in the  market as a whole, but technical indicators such as the RSI (25-days) started to flash red, and performance relative to the TOPIX also showed signs of peaking out."
• "Charts already giving off positive signals for some economy-sensitive and export-related stocks: By contrast, some economy-sensitive and export-related stocks have started to show signs of bottoming. Indeed, some charts have already begun to give off positive signals. For example, Shin-Etsu Chemical [4063], Komatsu [6301], Nissan Motor [7201], Honda Motor [7267], Canon [7751], and Mitsui & Co [8031] have broken through the upper limit of the resistance band (cloud) on the daily Ichimoku Kinko Hyo equilibrium chart, and their MACD based on share prices relative to the TOPIX has moved into positive territory or moved upwards within negative territory. Companies such as Nippon Steel [5401], JFE Holdings [5411], Sony [6758], and Mitsubishi Corp [8058] appear likely to join this group in due course."
• "Other stocks for which charts are giving off positive signals: Meanwhile, the charts have started to give off positive signals for stocks other than those sensitive to the economy and exports, including Japan Tobacco [2914], Astellas Pharma [4503], Tokio Marine Holdings [8766], Mitsubishi Estate [8802], Nippon Telegraph and Telephone [9432], and NTT Docomo [9437]."
• "No need for excessive pessimism despite ongoing downside risks for some stocks: By contrast, we see ongoing downside risks for some stocks, including megabanks such as Mitsubishi UFJ Financial Group [8306], Seven & i Holdings [3382], Toshiba [6502], Toyota Motor [7203], and East Japan Railway [9020]. However, we see no need for excessive pessimism, as most are stocks that look to be trading in their bottom range over the longer term and/or stocks with limited downside risk, based on technical indicators."

US Mid-Terms: Still The Economy, Not The Tea Party

- "The Tea Party movement, the latest manifestation of a deeprooted tendency in the US, is now set to dominate coverage of the run-up to the 2 November Mid-Term elections."
- "But we doubt that its recent successes in the Republican primaries will have any significant impact on the outcome of the Mid-Terms where the economy will remain pivotal."
- "Overall, it remains our view that the Republicans are likely to secure a majority in the House of Representatives but will struggle to do likewise in the Senate."
- "Irrespective, we anticipate gridlock in Congress through to 2012, even though a Republican majority in one or both houses would be an incentive to reach compromises with the Democrats."
- "Most importantly to sentiment in the short to medium term, we look for agreement to be reached on extending all the Bush tax cuts for 12 months once the Mid-Terms are out of the way."
- "Beyond that, we expect little agreement on fiscal policy other than, possibly, more help at the margins for business."
- "We also expect bipartisan agreement on keeping the pressure on the Administration to take more punitive action against China’s alleged “currency manipulation”."
- "We do not expect possible Republican efforts to repeal healthcare reform to be successful."
- "Legislation to limit carbon emissions now looks unlikely; so the Administration may resort to regulatory measures."
- "Sarah Palin, the Tea Party’s de facto leader, appears to be positioning herself to run in the 2012 Republican presidential primaries. We do not dismiss her chances."

JPY intervention starts

- "Last week was historic for USD/JPY. On 14 September, the DPJ leadership election saw the previous DPJ Secretary General Ichiro Ozawa lose his challenge of Prime Minster Kan. Ozawa was regarded as a stronger advocate of yen-selling intervention than Kan and market participants lowered their expectations of intervention once Kan won. With US rates falling, USD/JPY fell below 83 in the New York session that day, declining to 82.88 in the Tokyo session on 15 September, finally prompting the first Japanese government intervention since March 2004. The move immediately sent USD/JPY to 85. Since 16 September, there has seemingly been no further intervention. USD/JPY at one point declined to 85.23 on 16 September as Japanese exporters sold USD, but otherwise it maintained an 85 high as market participants remain alert to intervention and US markets stayed relatively calm."
- "Should USD/JPY move to a low 85 we would expect a second round of intervention. If the MOF fails to indicate 85 as a defensive line, USD selling against JPY might accelerate, particularly as government officials have already specified 82 as a line worth defending. We believe USD/JPY has the scope to weaken to 86-87, but as exporters are likely to sell USD forward at these levels, we expect limited upside for USD/JPY. Judging by fragile US fundamentals, we lowered our USD/JPY forecasts on 6 September and now expect USD/JPY to trade at 82.5 at end-2010 and at 80 at end-March 2011, even after considering the effects of intervention. We recommend shorting USD/JPY if it rallies to 86-87."

Relationship between spare crude oil supply capacity and prices

- "Crude oil prices continue to consolidate in a lateral range. We largely attribute their range-bound action to an uncertain economic outlook. Another factor militating against an upside breakout of their trading range is the existence of ample supply capacity globally. If the global economy weakens, crude oil prices would likely gain downside momentum. Conversely, if crude oil demand grows as projected by the IEA amid favorable economic conditions, upward pressure on crude oil prices would presumably begin to intensify. Spare crude oil supply capacity is currently equivalent to 6.4% of demand, a historically price-suppressive level. However, curtailment of petroleum resource development during the 2008–09 economic downturn bodes unfavorably for growth in production capacity through 2012. If demand grows in line with the IEA's forecast without any offsetting growth in production capacity, we estimate that spare supply capacity will fall to 4–5% of demand. Historically, when this ratio of spare supply capacity to demand has fallen below 5%, crude oil prices have risen steadily, fueled by concerns about supply constraints. Spare supply capacity bears close watching in terms of the outlook for crude oil prices."

India: Small plays on the big capex idea

- Infra capex — next ramp-up point approaching "We believe the Indian investment cycle is likely to witness a significant structural inflection in the next few years, led by a significant improvement in the cashflows of private infrastructure operators. Despite some short-term delays, the story on both infra and corporate capex is expected to be strong in India. We think that 2012-13 will see a significant inflection in activity levels in the Indian infrastructure sector."
- Industrial capex turning around "On the corporate capex side, while the picture is becoming positive, companies with dependence on large and late-cycle industrial capex have not recovered fully.
Overall, strong demand, high capacity utilisation and a relatively stable macro environment present a positive environment for a revival in corporate capex."
- Looking for mid-cap beneficiaries "We have looked at mid-cap (US$200mn-US$1.5bn) companies which are fairly leveraged to and are likely to benefit significantly from a pick-up in capex activities. These are companies with strong competitive positions in relatively consolidated industries with large capacity expansions (without equity dilution)."
- Our top mid-cap picks "Voltas (18.4% earnings CAGR over FY10-12F, 40.6 % ROE, 15x FY12F P/E) is a well established, liquid stock with a world-class engineering project portfolio and a successful refrigeration business. Triveni Engineering’s (52% CAGR over FY10-12F, 20% ROE FY09, 14.6x FY12F P/E) tie-up with GE brings its market-leading turbine business into sharper focus and a spin-off could unlock value. Sterlite Technologies’ (14% CAGR over FY10-12F, 32% ROE, 10.7x FY12F P/E) strengths in optical fibre and power conductors fit right into telecom expansion and the significant growth in power capacity. Maharashtra Seamless (13% CAGR over FY10-12F, 16% ROE, 7.5x FY12F P/E) is the leading supplier of seamless pipes to the oil and power industries. We also present Nomura Nuggets (non-rated reviews) on GEI Industrial Systems, Elgi Equipments and Techno-Electricals."

Musical chairs

- "The M&A theme is back. When we wrote Musical chairs in November 2006, we felt that the corporate world was ready for a round of consolidation. This played out during the 2007 frenzy brought on by the rapid rise of the emerging-market economies. The world has changed much since then, but we believe conditions are ripe for another wave of M&A in Asia Pacific ex-Japan."
- "Despite widespread concerns over a 'balance sheet recession' in the US, the corporate sector is behaving very differently from households. Companies are re-leveraging given the ability to fund themselves at close to historically low rates."
- "When new order flows slow down, acquiring competitors to increase market share becomes more attractive than capex, given the still real risk of initiating new investment only to find that the demand has evaporated by the time a plant opens one or two years hence."
- "In this report, we highlight five stocks that we think are likely to be under scrutiny as potential acquisition targets: MobileOne (BUY), Biosensors (BUY), Korea Exchange Bank (BUY), Primary Health Care (BUY) and Wing Hang Bank (Rating suspended). We include fresh updates on the four rated stocks."
- "We include global data on M&A and corporate fund-raising."

Battle of the QE2s

- Japan’s intervention: a sterile debate
"The MOF’s FX intervention gives the BOJ another shot at QE, which it should take."
- United States: Time to act
"Growing downside risks warrant the next phase of QE."
- Europe: Shell-shocked but not shell-bound
"Euro-area consumers seem to have resumed spending but a boom is not imminent."
- Japan: Policymaking for a new cabinet
"The new Kan cabinet faces challenges on a range of economic issues."
- China: A soft landing underway
"We lower our growth forecast to 10.2% for 2010 but hold to our 9.8% forecast for 2011."
- EEMEA: Minimal impact from Basel III
"Most EEMEA banking sectors already meet Basel III standards but challenges remain."
- ASEAN: Fiscal exit by stealth
"Fiscal 2010 results will likely exceed budget and in some cases may be contractionary."
- Turkey: No ‘new normal’ yet for Turkish GDP 

"The recovery increasingly looks like previous ones. We revise our 2010 forecast."
- South Africa: Pravin Gordhan and Susan Shabangu event
"We hosted a meeting with South Africa's Ministers of Finance and Mineral Resources."
- Mexico: Policy rate cuts unlikely
"Expectations of an interest rate cut have risen but we expect no change until Q1 2012."

Latvia and Hungary: Start October headache

- "We see a troublesome threesome in emerging Europe, hidden below the current decent risk conditions and bond inflows to emerging market funds. Hungary, Latvia and Romania each have risks connecting fiscal, politics and elections. We wrote about Romania last week in “Metastable Equilibria” and the rising risks of early elections and disintegration of the cabinet. Now we look at the other two countries in a little more depth. However, these three countries and their respective domestic fiscal nd political stories can feed back on one another, and we believe this could develop into a more generalised regional sovereign risk story. This could well become important at the start of October with the Latvian parliamentary elections on the 2nd and then the Hungarian local elections on the 3rd."
- "This theme is particularly relevant as we move though H2 and towards next year as these countries are reaching the end of their IMF credit lines (October 2010 for Hungary, April 2011 for Latvia and May 2011 for Romania). More than that these countries face potential difficulties funding in the market under adverse risk conditions, and IMF repayments could add further difficulties down the line (although all have a significant proportion of IMF/EU aid still in reserve, drawing down reserves is not a good sign) although that will not start for another year or two. On top of this, we expect the market re-focus on the issue of peripheral Europe and how it will fare through 2011, and so any risk in CEE is likely to be associated with a corresponding country in western Europe. In particular Hungary is obviously linked via its banking system to Germany. Romania is linked to Greece and the rest of the periphery in both banking and export terms, while Latvia has its classic linkage to Sweden."
- "The Hungarian government has turned its back on the IMF/EU lending package and appears to have “got away with it” so far. Risk sentiment towards EM countries in general is positive and bond inflows have remained moderately supportive. In addition, some in the market believe that the government is on the right path. However, the risk that other governments (or opposition parties) try to force a similar anti-Brussels/Washington consensus line is being closely watched by the EU and we believe any such behaviour will be stamped out quickly in a flurry of rhetoric and if necessary warnings of likely consequences."
- "As ever with such events, markets are likely to be slow to react, in part because results will not be known for some time and also in the case of Latvia because coalition talks may well take a month or more. The speed of market reaction may well be influenced strongly by the degree of risk tolerance of markets in three and a half weeks’ time."

India: Lay of the land

- Demand and growth – tightening, capacity constraints, rural versus urban
- Government finances – telecom collections upside surprise, growth leverage, rolling back of sops
- Inflation – about to roll over
- Rates – short versus long term, liquidity lessons, inflation and policy
- Currency – flows, current account, intervention policy, monetary policy
- Market valuations and sector preferences

China: A soft landing underway

- Global Letter   
• Japan’s intervention: a sterile debate
- Feature Articles  
• China: A soft landing underway  
• ASEAN: Fiscal exit by stealth
- Data Preview  
• The week ahead
- Chart Alerts  
• Leading economic indexes for China and India  
• Australia: Consumer sentiment moderates in September
- Outlook 2010-2012  
• Australia: Growth momentum building  
• China: Reform platform for sustainable growth  
• Hong Kong: Moderating, but solid growth 
• India: RBI to stay on hold  
• Indonesia: Monetary and fiscal normalisation begins  
• Malaysia: Rate hikes are over for now  
• New Zealand: Earthquake reconstruction to boost growth  
• Philippines: Going for growth  
• Singapore: More property market measures  
• South Korea: When doves cry  
• Taiwan: Robust economic expansion continues 
• Thailand: Still on track to normalisation  
• Vietnam: Some encouraging fiscal numbers

European periphery: think relative

- "At a time when economic data in the euro area has been surprising on the positive side, negative headlines in the European periphery last week pushed spreads to Bunds above the pre-stability package highs in early May. Despite a subsequent recovery, the scale of accumulated potential losses on peripheral assets remains highly sensitive given the central role played by banks in particular in the supply absorption process. While most of the focus in this respect is on domestic banking sectors, the latest BIS statistics on foreign claims add another piece to the jigsaw in assessing the overall burden. It reveals evidence of cross-border sharing of losses, making the digestion process more manageable. In this article, we take a deeper look at the BIS data in an attempt to quantify the extent of this dynamic. On the whole, we believe it adds to the contention that pessimism regarding the periphery is overdone even though there is still a long way to go in the remedial process."

Bond Market: May You Live in Interesting Times

- "Living in interesting times can be a blessing and a curse. Two recent events captured our attention: the potential for more Fed QE and the MOF intervention. In this piece, we explore the meaning of both these events, highlighting that we expect Fed action to be gradual and that a $100bn in asset purchases translates into about 25bp of easing. Turning to Japanese Treasury buying, we examine the three phases of purchases over the last year, noting the transitions in the various steps."
- "The first phase of buying lasted from March-April of this year and was evidenced by an acceleration of purchases of foreign bonds by Japanese investors as a ―we’ve seen this before‖ mentality took hold, encouraging US Fixed Income purchases. The second phase, which lasted from about May-Aug of 2010 was characterized by private intervention in the Yen, coupled with a desire to earn carry via USTs. The final phase, which we are entering now, consists of official buyers motivated by broader policy goals and not necessarily by short-term profit incentives. Although continued FX intervention appears more likely in this phase, we caution against investors getting too far ahead of themselves. Reserve accumulation by the Japanese authorities may not immediately translate into Treasury buying, though the end-of-month auctions and custody data may provide some signs."

China water: Flowing strongly

- Pressing water shortages raise awareness of conservation• "Severe drought in southern Chinese provinces has threatened rice crops and reservoirs."• "Macau and Zhuhai rely on the Xijiang River in Guangdong, and they experience salt tides."
- 12th Five-Year Plan to lend further support to the sector• "Continued focus on water conservation: bodes well for tariff hikes and privatisation, in our view."• "Investment of RMB700bn during 2011-15F (up from RMB330bn during 2006-10) in wastewater treatment industry is forecast by the Ministry of Construction."• "Opportunities in recycling water: target to recycle 10% of wastewater emission in urban area by 2015F, representing a CAGR of 24% from 2009."
- Tariff hikes should come in steeper and more widely• "Avg water tariffs in 36 major cities grew by 8%, from RMB1.7/m3 in Jun 2009 to RMB1.84/m3 in Jun 2010"• "Chinese water tariffs only account for 0.8% of disposable household income."
- Wastewater treatment: maturing, but growth will be sustained• "As the market matures, capacity growth should slow to 8% pa from 2010F, compared with 11-16% in 2006-08, by assuming a wastewater treatment ratio of 90% by end-2015F."• "But we are not close to over-capacity, given third- and fourth-tier cities and counties are still showing wastewater treatment ratios of 30-50%, compared with 73% in urban areas in 2009 and 80%-95% in OECD countries."

- Tap water supply remains a privatisation story
• "Management ability in M&A execution and track record are key success factors."
- Waste-to-energy is the next attraction
• "Industry is still in its infancy, though proper legislation should open up opportunities."

• "WTE should outshine other waste treatment projects in terms of capacity growth, at 17% CAGR versus 10% in overall waste treatment, given it has higher environmental standards and energy efficiency but accounts for less than 20% of China’s residential waste currently being treated, compared with 80% from landfill sites."

- Defensive against rising commodity prices and inflation
- Risks: intensifying competition, rising interest costs
- Our stock-picking criteria and preferences

• "Search for company-specific strengths to identify outperformers in the sector — solid track records and rich catalysts for growth in 2010-11F, followed by quality management, undemanding valuations, and healthy balance sheets."
• "Preferences for quality players: Guangdong Inv’t (270 HK, BUY), China Everbright Int’l (257 HK, BUY)."
• "Risks/rewards opportunities: Beijing Enterprises Water (371 HK, BUY), China Water Affairs (855 HK, BUY), Sound Global (SGL SP, BUY)."
• "NEUTRAL on Hyflux (HYF SP) due to financial risks as overhangs."
• "Avoid Tianjin Capital Environmental (1065 HK, REDUCE)."

JPY intervention starts as we expected

- JPY intervention starts as we expected "The MOF intervened unilaterally in the forex market on 15 September by selling JPY, likely triggered by the government’s motivation to defend the 80 line. Although the intervention was unilateral, we think it was probably unsterilized (i.e., that the BOJ is unlikely to try to mop up the liquidity created). Judging by reports that MOF sold some ¥2.0trn of JPY on 15 September, we estimate that by the time its intervention is finished they would have sold ¥10–20trn. Although we estimate that USD/JPY could rebound to 85–87 in the near term, forex market trends are largely determined by USD weakness against all major currencies, which reflects the poor fundamentals of the US economy. We are therefore maintaining our forecast for USD/JPY at 82.5 by end-2010 and 80.0 by end-March 2011."
- Impact of JPY intervention on the rest of Asia "In our view, Japanese FX intervention (first since March 2004) marginally weakens the short USD/Asia story. Asian central banks may view Japan's intervention as an additional reason to resist local FX appreciation, despite global political pressure to move (namely on China). However, we do not believe the Asia ex-Japan authorities can argue on the same fundamental basis as Japan given the large divergences in broad economic performance, exports, equity markets and FX valuation. In this respect, we think that the impact of JPY intervention could be important, but not decisively for Asian FX. This may, for example, support reducing our short USD/CNY trade. However, we do not think that it markedly alters the core story (see FX Insights: China Visit Notes, 1 September 2010). Likewise, it reduces our conviction on our short EUR/KRW trade (See FX Insights: Recommend marginally adding a short EUR/KRW trade, 6 September 2010)."
- JPY - Why JPY appreciation had accelerated despite an increase in Japanese outward investment
"In August, USD/JPY dipped below 84, its lowest level in 15 years, as JPY continued to strengthen. However, the MOF's latest International Transactions in Securities report revealed that Japanese net outward portfolio investment increased to roughly ¥5trn in the same month. We see three likely reasons for the apparent contradiction between an increase in outward portfolio investment and observed acceleration of JPY appreciation: (1) transactions not involving forex transactions, (2) purchases of short-term Japanese bonds by a number of foreign government investment institutions, and (3) currency hedging by Japanese institutions and companies. What appeared at first sight to have been large-scale Japanese outward investment in August turned out not to be powerful enough to reverse the downtrend in USD/JPY in August."
- GBP: Further recovery in store "This week, we released the second in our series of Strategic Currency Views, which presents a comprehensive analysis of the key factors influencing the outlooks for currencies. Here we summarise our findings for sterling. For the outlook in its entirety, please see The UK pound: Further recovery in store, 14 September 2010."

- RBNZ signals slow path to a lower “neutral” rate: Receive NZD IRS 5fwd 5yr "The Reserve Bank of New Zealand (RBNZ) kept its policy rate unchanged at 3.0% today, which was widely expected, but the policy statement and subsequent comments by Governor Alan Bollard were more dovish than expected. The RBNZ is signaling both a slow path to a “neutral” policy rate, and that the level of that “neutral” rate has declined. We recommend maintaining long duration positions in the NZD IRS curve, but see the NZD IRS 5fwd 5yr as currently offering a more attractive opportunity than the front end of the curve. For investors concerned about liquidity risk in terms of the IRS curve beyond 5 years, we also see value in receiving the NZD IRS 2fwd 2yr."
- EMFX Portfolio Update: Enter ILS 1v2 steepener, a proxy 1y1y payer "Israel is one of the few emerging market countries whose unemployment rate has reached pre-crisis levels. Increasing inflation expectations and housing prices all suggest that the ILS front end is very vulnerable to the upcoming inflation releases. In addition, the 1v2 slope appears cheap by around 20bp on a number of metrics. To establish our view in a low-carry way we are putting USD10k to the 1v2 steepener. We also continue to recommend USD/ILS shorts, based on the higher probability of a faster pace of rates hikes."
- EMFX Portfolio Update: Fading RUB's temporary MXN disease "We recommend buying a RUB basket – selling 3m USD/RUB and EUR/RUB (entry 34.75, stop 35.25, target 33.65) – based on our explanations of recent underperformance and our identification of various changing dynamics. Inflation should provide a catalyst for the rouble as the trend caused by the negative food price shock appears to have reversed, partly due to the lagged effects of monetary and fiscal loosening during 2009. In the NDF space we see rate differentials on the rise after a period of contraction since Q4 2009, which would have turned off yield-hungry investors. Furthermore, REER overvaluation retracement, a declining external debt repayment schedule, relative equity market underperformance and upsides from any oil price increment are all supportive of the trade."
- FX Quant Insights: Pump up the volume "Volume data are often used in other asset classes (such as equities) to act as a further input into technical trading rules. In FX, they tend to be used less, largely because of the scarcity of volume data. The idea of using volume data is that they can be used to confirm technical moves. If there is a significant technical break higher and volume does not spike, we would conjecture that the move is relatively shallow. Conversely, a spike in volume would be supportive of the price action. Our focus is on combining on balance volume (OBV) with more traditional technical-based momentum style trading rules. In particular, we look at breakout style rules on OBV. Our volume-based basket has annualised returns of 3.9% and an information ratio of 0.66 since 2002."

Nikkei Average rebound to test July high of 9,800 or June high of 10,250

- Japanese equity market—expecting rebound to continue in near term; move off bottom should be clear after Oct–Nov: On 1 September, the Nikkei Average fell to 8,796 and the TOPIX nearly dipped below 800, but they did not drop any further and have since started to rebound slightly. We think the indices did not fall as far as they might have because investor pessimism had already peaked, as suggested by the TSE’s short-selling ratio exceeding 30% on 1 and 2 September. We think the indices have likely entered a near-term rebound given that they have broken out of the diagonal triangle pattern on the chart that has been in place since April. If the yen appreciation that has impeded any market rally enters a more pronounced lull, we could see Japanese equities stage something of a rebound toward the rally highs of 14 July (9,807 for the Nikkei Average, 874 for the TOPIX) or 21 June (10,251 and 904). On the other hand, the wave count suggests that we are in a consolidation phase ahead of the next rally, and thus the market could remain in a broadly defined holding pattern until Oct–Nov. Only after this do we think it will become clear that equities have moved off their bottom.
- US equities—likely to trade in tight range until Oct–Nov: US equities have been regaining ground since 27 August. The three main indices have broken through the resistance line connecting 26 April and 9 August highs, and are now within sight of those same 9 August rally highs (10,719 for the DJIA, 1,129 for the S&P 500, 2,309 for the NASDAQ composite). A normal correction pattern based on wave count would point to the rebound from 27 August running out of steam, but if the three main indices regain their 9 August rally highs, it would add weight to the possibility that the correction phase ended with July lows (9,614 for the DJIA, 1,010 for the S&P 500, 2,061 for NASDAQ). Having said that, we make no major change to our view that US equities are likely to trade in a tight range until Oct–Nov, when the next four-month cyclical bottom is expected. Only after this do we think it will become clear that equities have moved off their bottom.
- Bond market—Japanese long-term interest rates heading for major bottom, followed by rebound; US long-term interest rates also heading for rebound off bottom: So long as the yield on newly issued 10-year JGBs does not fall sharply lower than the 25-day moving average (currently 1.02%), we think it will be fair to conclude that the yield of 0.895% on 25 August marked a major bottom. We think it is more likely to transition into an upward phase if it clearly breaks through resistance at the 1.15–1.19% level that has acted as a support line since 2004. We also think the yield on US 10-year T-Notes reached a bottom of 2.416% on 25 August. We expect yields to target the October 2009 low of 3.104%.
- Forex market—USD/JPY near to nine-month cyclical bottom, yen appreciation versus dollar in final phase; EUR/USD may have embarked on renewed upleg: USD/JPY is eyeing a drop below 83, but the chart suggests that the latest phase of yen appreciation versus the dollar may have entered its final phase. The nine-month cyclical bottom from the November 2009 low is approaching and technical indicators also suggest that the USD/JPY bottom is near. The diagonal triangle on the chart traced by the downtrend since May is now clearly visible, and we think the yen could be about to depreciate. In our view, USD/JPY could rebound to around 90 if large volumes of long yen speculative positions are unwound. The correction in EUR/USD from early August appears to have run its course and the rate may have already embarked on a renewed upleg.

- Commodity market—WTI crude oil prices could drop out of triangular holding pattern; COMEX gold futures could push on further from all-time high: WTI crude oil futures (front-month) have  oved into a triangular holding pattern, but wave count suggests that they are likely to fall south out of this pattern. If they were to fall below the key technical juncture of around $70–71, this could lead to further declines. Having reached an all-time high, we think COMEX gold futures (front-month) could push on toward $1,369/troy oz.

Richard Koo: fiscal stimulus remains essential

- Globalized economies, localized politics

- Extreme economic pessimism has diminished

- Even monetary authorities lack confidence in US economy

- Is recession really attributable to Obama reforms?

- US monetary authorities admit they cannot rule out balance sheet recession

- Two concerns of people who understand that US is in balance sheet recession

- US politics characterized by growing polarization and obstruction tactics

- Obama has proposed second round of fiscal stimulus

- Little chance of new measures becoming law immediately

- Banks in some parts of US are easing lending posture

- Significance of IMF’s support for fiscal stimulus

- Change in stance by IMF and UNCTAD may prevent double-dip recession

- DPJ leadership election debates laid foundation for fiscal stimulus in Japan

- Lessons of the failed social experiment called Incubator Bank of Japan

- Incubator Bank of Japan’s creation also tied to bashing of BOJ and Japanese banks

- Will cap on deposit insurance really be a plus for Japan’s economy?

- Limits to what banks can achieve in a balance sheet recession

JPY intervention starts as we expected

- "MOF intervened unilaterally in the forex market today by selling JPY, likely triggered by the governments motivation to defend the 80 line. The decision was also likely motivated by the excessive nature of JPY appreciation in light of US stock market and interest rate trends, and by domestic political conditions following the DPJ leadership election. Although the intervention was unilateral, we think it was probably unsterilized (i.e., that the BOJ is unlikely to try to mop up the liquidity created). Judging by reports that MOF sold some ¥1.5tn of JPY today, we estimate that by the time their intervention is finished it could have sold ¥10–20tn."
- "Based on the impact of previous intervention and the current level of US interest rates, we estimate that USD/JPY could rebound to 85–87 in the near term. However, forex market trends are largely determined by USD weakness against all major currencies, which reflects the poor fundamentals of the US economy. Judging from past interventions, such JPY selling can only prop up the USD for one to two months, thereafter developments will once again depend on US fundamentals. We are therefore maintaining our forecast for USD/JPY at 82.5 by year-end 2010 and 80.0 by end-March 2011."

Impact of JPY intervention on the rest of Asia

- "Confirmation that the Japanese authorities have intervened in USD/JPY (the first intervention since March 2004) marginally weakens the short USD/Asia story, in our view. Asian central banks may view Japan’s intervention as an additional reason to resist local FX appreciation, despite increased global political pressure to move (namely on China and to some extent Korea ahead of the G20 summit of 11-12 November). However, we do not believe the Asia ex-Japan authorities can argue on the same fundamental basis as Japan given the large recent divergences in broad economic performance, exports, equity markets and FX valuation. In this respect, we think that the impact of JPY intervention could be important, but not decisively for Asian FX. This may, for example, support reducing our short USD/CNY trade (as it reduces our conviction in that trade from 75% to say 65%). However, we do not think that it markedly alters the core story (see FX Insights: China Visit Notes, 1 September 2010).1 Likewise, it reduces our conviction on our short EUR/KRW trade to perhaps <60% from 65% previously (See FX Insights: Recommend adding a short EUR/KRW trade, 6 September 2010)."

Relative share price MACD maps

- "In this report, we consider the use of relative share price Moving Average Convergence-Divergence (MACD) maps as a sector rating and stock selection tool. Relative share price MACD maps can be used to determine which sectors or stocks are the most attractive candidates for long or short positions from a technical analysis perspective. For example, in the exhibit below, an MACD map based on share prices relative to the TOPIX (for TOPIX-17 Series sectors as of 3 September 2010) indicates that the electric power & gas, pharmaceutical, foods, real estate, automobiles & transportation equipment, and commercial & wholesale trade sectors are potential candidates for long positions. However, electric power & gas is at the top of the map and looks close to a turning point. Conversely, the energy resources, electric appliances & precision instruments, raw materials & chemicals, and retail trade sectors appear to be potential candidates for short positions. The map indicates that financials (ex banks) is another possible candidate for shorting, but we think this sector is also approaching a turning point and should actually be considered for bottom picking from now on. At the end of this report, we provide MACD maps based on share prices relative to the TOPIX for the top five companies in terms of market cap in each of the TOPIX-17 Series sectors."

• "Relative share price MACD can be used for sector ratings and stock selection: MACD is a technical analysis trend indicator that focuses on the widening or narrowing of the gap between a short-term moving average and a medium-term moving average. In general, although technical indicators are useful for helping to identify the optimum timing of transactions in individual indices or stocks, they are not easy to use for the purpose of a side-by-side comparison of individual sectors or stocks. MACD is no exception in this respect, but the use of MACD based on relative share prices enables us to avoid the problem of trading signals being affected by the direction of the market as a whole or being skewed toward a particular position."

• "Basic concept of relative share price MACD maps and how to use them: In this report, we present
relative share price MACD maps as a sector rating and stock selection tool. By plotting the relative  hare price MACD on the x-axis and the MACD histogram on the y-axis, we can see the relative status of each individual sector or stock at a glance. The MACD maps show movements in the various data series over time, and our basic strategy is that sectors or stocks that are either in the 1st quadrant or about to move into it are potential candidates for long positions, while sectors or stocks that are either in the 3rd quadrant or about to move into it are potential candidates for short positions. In addition, the direction of each individual data series can help identify which stocks to buy on dips and which stocks to sell to lock in profits, within a particular quadrant, by indicating the strength or weakness of the buy or sell ratings."

The UK pound: Further recovery in store

- GBP: "We expect GBP to strengthen on a TWI basis into year-end. Our year-end target for EUR/GBP is 0.80 (our USDGBP forecast are under review)."
- Country-specific factors: "Key bullish factors include cheap valuation, favourable M&A and central bank flows, recovery in the financial sector, and a clear fiscal consolidation plan (and stable CDS spreads). The deteriorating housing market is likely to be the main negative influence over coming months."
- Global USD direction: "A dovish Fed along with below-potential growth in the US (but no double-dip recession) should facilitate USD weakening into Q4."
- Global risk factors: "After a period of elevated risk aversion, we expect the risk environment to shift to neutral for the next 3-6 months."

• "We expect the UK economy to grow at a slow pace in 2010 and 2011, at 1.7% and 1.9% respectively, following the announced budgetary spending cuts (this forecast is close to consensus)"
• "CPI inflation has been persistently high over the last few months – far higher than the Bank of England (BoE)’s 2% target rate. However, it has started to moderate. We expect inflation to remain high for the rest of this year and not to hit its target rate until 2012. The rise in the VAT rate in January 2011 should provide further upward pressure to consumer prices."
• "Nomura’s economics team forecasts the BoE to hike rates by 25bp in February 2011 to 0.75% and again in May 2011."