The Coming Week: Wall Street Likely to Focus, Again, on Things Japanese
By Justin Lahart
Senior Writer
6/26/98 5:51 PM ET
In normal times, when the second quarter draws to a close, investors have focused on two things: upcoming earnings reports and the Fed's July meeting. It is true that these will be things that Wall Street will watch in the coming week (though, in the case of the Fed, only cursorily), but once again Asia has shouldered its way into investors' consciousness.
"I don't like to throw water on the parade," said Hugh Johnson, chief market strategist at First Albany. "I realize that earnings season is important, but the primary focus or issue for the market is not second-quarter earnings. The principal issue for the market is earnings in the third and fourth quarters of this year and the first and second quarters of next year."
And earnings for those periods, says Johnson, depend on Asia. "Japan and Southeast Asia are not going to recover in 1998, but the prospect for 1999 is important. That will turn very heavily on what happens to dollar/yen, which will depend on Japan's response to international pressure. The key variable to what happens to Asia is Japan."
Anything like resolution, one way or the other, of whether the Japanese government has found the political willpower to deal with banks' long-standing debt problems, is a ways off. Until the July 12 upper-house elections, it will be difficult to gauge exactly what kind of reform plans the government will implement. That said, there are a number of things the market will be watching through the week to try to tease out where things are headed in Japan.
Japan's ruling Liberal Democratic Party meets on Sunday to discuss plans for the possible formation of a "bridge bank" to dispose of banks' bad loans. Prime Minister Ryutaro Hashimoto is expected to make some comments following the meeting.
More important than what Hashimoto and other leaders say, at least in the short term, is the tankan, Japan's quarterly survey of business sentiment, due Monday morning in Tokyo (7:50 p.m. EDT Sunday in the U.S.). (The Bank of Japan makes the tankan available on its Web site.) Expectations are that it will be grim looking -- particularly since the survey was taken shortly after the BOJ released figures showing a surprising 1.3% decline in Japan's fiscal fourth-quarter gross domestic product for the period ended March 31. That may compel the BOJ to intervene in the currency market on Monday. If the BOJ doesn't sell dollars on Monday, that will embolden dollar bulls, according to Marc Chandler, currency analyst at Deutsche Bank Securities and a TSC contributor. "I think the market smells blood," he said. "I think the market has its sights set on 150, and I think we're going to get there."
Not everyone, though, is so pessimistic on the possibility for reform in Japan.
"My sense is that the markets are extremely pessimistic, but it's always darkest before the dawn," said David Jones, chief economist at Aubrey G. Lanston. "I sense from my sources that the public is focusing more on the threat of deepening recession. I think they have begun in recent months to focus on the dangers of prolonged recession. This should give Hashimoto a bit more support in moving rapidly."
Johnson also feels optimistic on Japan, though he acknowledges that the call comes as much from his gut as from his head. Recent Market Vane reports have shown bullish sentiment in the bond market on the rise, and while there's a lot of chatter about how the "smart money" is on the dollar these days, it appears that a lot of the rest of the money is there, too. The body language from Japanese officials suggests that the chances of reform are much more real now than they were back in November, yet the market, burned by rhetoric out of Tokyo so many times before, is giving them very little credit. Japanese officials crying reform are a bit like the boy who cried wolf. Only in this case, says Johnson, it's the market that's in danger of being eaten. "When there's so much optimism and bond and dollar bulls," he said, "look out."
The extent to which the equity market will watch Asia in the coming week is unclear. The Street appears to have taken hold of the notion that the U.S., by intervening in the currency markets on July 16, drew a line in the sand: Things may be bad, but America isn't going to let a meltdown happen. And then, with the market closed on Friday for July 4, volume will likely be low -- a recipe for futures-led action and lots of volatility. Where the market goes may have as much to do with the programs running on computers in super-cooled rooms in places like Greenwich and Stamford than anything else. |
