Asian Morning Briefing: Dow, S&P 500 Edge Higher

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1 Asian Morning Briefing: Dow, S&P 500 Edge Higher Dan Strumpf November 17, 2014 MARKETS AT A GLANCE

2 SNAPSHOT The Dow industrials and S&P 500 eked out gains on hopes for additional stimulus in Japan and Europe. The dollar strengthened on a divergence between recovery in the U.S. and struggles in Japan and Europe. Gold fell on the dollar s strength. Treasurys finished lower as new corporate-bond supply weighed. Oil prices remained down amid a global supply glut. OPENING CALL The Reserve Bank of Australia is set to release minutes Tuesday from its Nov. 4 policy meeting. While the bank remained on hold on rates, investors will look to the minutes to see if committee members were happier with the value of the Aussie dollar, or did they think it was still too strong? And since the meeting came straight after the BOJ s shock yen-weakening move to boost asset purchases, did that raise concerns among any of them? EQUITIES The Standard & Poor s 500 eked out a fresh record close, its 42nd this year, as investor expectations rose for additional stimulus measures in both Japan and Europe. News that Japan s economy slid into a recession failed to dent stocks in the U.S., as investors largely focused on the prospect of additional stimulus measures by the world s third-largest economy. Investors were also cheered by comments from European Central Bank Mario Draghi that the ECB was open to expanding its easy-money policies. The Dow Jones Industrial Average also edged higher, finishing five points shy of a new record high, but the Nasdaq Composite Index lost ground. The unexpected news that Japan s economy contracted 1.6% between July and September was the latest sign of flagging economic performance in major economies outside the U.S. The contraction follows a decline in gross domestic product of 7.3% in the prior quarter, meeting the conventional definition of a recession. The news sent Japanese stocks tumbling. Investors in the U.S., however, took the news in stride. Following the news, a close adviser to Prime Minister Shinzo Abe called for tax cuts and cash handouts as part of a stimulus package valued at more than $25 billion. Brendan Connaughton, chief investment officer at ClearPath Capital Partners, which manages more than $250 million, said the recession opens the door to deeper stimulus measures and could also forestall a consumption tax increase scheduled to take effect next year.

3 Japan will just supercharge their asset purchases even more, Mr. Connaughton said. Meanwhile, investors were also buoyed by remarks from Mr. Draghi that the ECB was open to government-bond purchases if needed to keep inflation from staying too low for too long. The remarks underscored the central bank s commitment to expand its balance sheet, that globally have been credited with propping up financial assets such as stocks in recent years. In economic news, New York manufacturers said business conditions improved slightly in November. The New York Fed s Empire State business conditions index rose to from 6.2 in October, according to economists surveyed by The Wall Street Journal. In corporate news, Pfizer shares fell 0.1% after Pfizer and Germany s Merck KGaA said they will work together to develop a new tumor treatment product. Pfizer lowered its fullyear earnings guidance because of the deal. Merck KGaA isn t affiliated with the U.S. s Merck & Co. Shares of Halliburton fell 10.6%, while those of Baker Hughes jumped 8.9% after Halliburton agreed to buy rival oil-field services company in a deal valued at $34.6 billion Actavis said it would pay $66 billion in cash in stock for Allergan, in a tie-up that appeared to thwart a hostile takeover of the Botox maker by Valeant Pharmaceuticals International. Actavis shares rose 1.7%. Allergan stock jumped 5.3%. Valeant shares rose 1.9%. In Asian trading Monday, Tokyo shares fell sharply after data showed Japan s economy falling into a recession, but Shanghai stocks rose on strong buying by global investors under a new and widely anticipated trading program. FOREX The dollar gained against the yen and euro as economic and policy news abroad underscored a divergence between recovery in the U.S. and struggles in Japan and the eurozone. Japan s economy slipped into recession in the third quarter. Its gross domestic product contracted an annualized 1.6% in the three months ended Sept. 30, far short of economists forecasts for a 2.25% expansion. The yen fell to its lowest level since Oct. 17, 2007, on the news during the Asian session, only to come off that low as the Nikkei dropped nearly 3%. The dollar strengthened as data in the U.S. missed economists forecasts but still pointed to modest gains in manufacturing.

4 The unexpected contraction in Japan s GDP sets the stage for Prime Minister Shinzo Abe to delay a scheduled sales-tax increase on Tuesday, dissolve the lower house on Wednesday, and hold a general election on Dec. 14, currency analysts at Barclays wrote in a research note. The Bank of Japan is scheduled to deliver a policy statement on Wednesday. The central bank recently said it would increase its annual purchases of assets to battle deflation. The dollar-yen trade is likely to see increased volatility for the short term, said Martin Schwerdtfeger, foreign exchange strategist at TD Securities. How Japanese stocks trade will move the yen, Mr. Schwerdtfeger said. The yen has been moving inversely to the Japanese stock market, as investors have been buying the currency as a haven asset during periods of political or economic uncertainty; investors generally regard equities as riskier assets. On Monday, however, both the yen and Japanese stocks fell in response to the GDP report. BONDS Treasury bonds pulled back for the first time in four sessions as new corporate bond debt supply outweighed a report showing Japan s economy slipped into a recession. New Corporate debt sales have been brisk this month as companies aim to lock in stilllow interest rates before the winter holiday season. So far this month, companies have sold $86.2 billion of bonds--including both investment-grade debt and junk bonds--in the U.S., according to data provider Dealogic. The 10-year Treasury yield has dropped sharply from 3% at the start of the year, which has sparked a boom in corporate bond sales. This year, highly rated companies have sold $1.078 trillion of bonds in the U.S., according to Dealogic. That is up from $1.019 trillion at this time in 2013, when corporate-bond issuance for the full year reached a record. The primary market has been busy as companies continue to take advantage of attractive funding costs, said Adrian Miller, director of fixed income strategy at GMP Securities. But the robust sales pushed Treasury yields higher, he said. Also pushing down Treasury bond prices Monday was a rebound in European stocks. Investors moved cash from haven bonds into equities after European Central Bank President Mario Draghi said in prepared testimony that the ECB would be willing to take additional monetary stimulus measures to keep inflation from staying too low. Such

5 easing measures by central banks globally have been credited with propping up financial assets like stocks in recent years. Treasury bond prices had risen earlier in the session as a downbeat economic release from Japan had boosted demand for ultrasafe U.S. government debt. The data was weak enough to start to validate some global economic slowdown concerns, said Anthony Cronin, a Treasury bond trader at Société Générale. COMMODITIES Oil prices continued their monthslong slide on expectations that the Organization of the Petroleum Exporting Countries would not act to reduce a global glut of oil. Prices have plunged for months as ample global supplies and weaker-than-expected demand growth have weighed on the market. Market watchers are focused on the Organization of the Petroleum Exporting Countries meeting Nov. 27. Traders are becoming more convinced that the cartel, especially top exporter Saudi Arabia, will not rein in production despite falling prices. Saudi and OPEC officials told The Wall Street Journal that Ali al-naimi, the Saudi oil minister, is expected to say at the OPEC meeting that Saudi Arabia won t cut production on its own. Privately, Saudi Arabia doubts the 11 other OPEC members would live up to a collective commitment to cut output, according to Saudi officials and Saudi oil industry executives. It s all about the Saudis at this point, said Bob Yawger, director of the futures division at Mizuho Securities USA. As long as the Saudis continue not to show their hand, in my opinion, we re going to continue to drift lower. Gold prices ended lower Monday as a stronger dollar edged out investors worries about tensions between Russia and the West. Source URL: