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The Biggest Surprise Wasn't... image

Perhaps the biggest surprise of the day Monday wasn't the fact that Japan suddenly finds itself back in a recession. Nor the fact that the Bank of England's Mark Carney began to publicly fret about deflation. Or that Super Mario started talking about QE again. Or even that David Cameron said that "red warning lights are flashing" in the global economy again.

No, the big surprise was that the U.S. stock market didn't seem to care. Not at all. Not about any of it. Interesting...

With a handful of rather shocking remarks, headlines, and speeches to pick from, the big surprise was that our furry friends in the bear camp came up empty handed. Again.

S&P 500 - Daily

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Stop and think about this for a moment. After a disastrous showing in Q2, where Japan's GDP plunged at an annualized rate of -7.3%, the economy in the Land of the Rising Sun was expected to rebound to the tune of +2.2%. Heck, the lowest analyst estimate on record for Japan's Q3 GDP growth rate was +1.00%. So, what happened when the GDP print came in at -1.6%?

In Japan, of course, things got ugly quickly as the Nikkei dove nearly -3%. And in the early going, the U.S. futures were sporting a bright red number. But by the time the opening bell rang at the corner of Broad and Wall (or perhaps more accurately, in Mahwah NJ), much of the worry had evaporated and it looked like business as usual.

Takeaway #1: Japan's Economy Isn't Important

So, what should investors take away from this rather strange action? First, the economy in Japan stinks. And the fact that the geniuses in charge implemented a sales tax at exactly the wrong time means that Abenomics still has a lot of work to do.

The chart below really tells the whole story.

iShares Japan (NYSE: EWJ) - Daily

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Although Shinzo Abe has held onto his job much longer than his recent predecessors, the weekly chart of Japan suggests that jury is still out on whether or not the QE-infinity bet the Prime Minister is making will pay off.

Compare the chart of the EWJ to the S&P 500. While many analysts argue that the U.S. economy and in turn, the stock market, is being propped up by the Fed, this chart would seem to suggest that investors have a lot more faith in the good 'ol USofA than Japan.

S&P 500 - Weekly

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Takeaway #2: Europe's Economy Isn't Important - Yet

Also in our list of rather surprising developments yesterday were the comments from the BoE's Carney, the ECB's Draghi, and the UK's David Cameron. With some of the key words contained in the headlines being "disinflation," "Sovereign QE," and "Warning Lights," one might have expected more of a reaction out of the algos that dominate the intraday of the U.S. stock market.

One might have also expected European bourses to sport a bit of a reaction. But in light of the fact that the mere mention of the words "sovereign QE" seems to trump any and all other news, it appears that the state of the European economy doesn't matter right now either.

iShares European Union (NYSE: EZU) - Weekly

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But then again, the chart above doesn't exactly paint a pretty picture. Thus, one can conclude that there might indeed be some issues lurking under the surface in Europe. Therefore, investors looking for something to worry about after the year-end mark-up season ends here in the U.S., may want to focus their attention on the sagging economies across the pond.

Takeaway #3: Yep, That's Right, It's Still All About...

So, since Japan's economic tank job, Carney's fretting and/or Cameron's words of warning failed to get the bears stirred up, there is really only one conclusion to come to. This market continues to be all about QE - regardless of what color the currency being printed is.

While QE is dead here in the U.S., it is clearly alive and well elsewhere in the world. As my friend Brenda Wenning wrote last week, "QE is dead, long live QE!"


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Turning To This Morning

The news flow out of Japan continues to dominate the market conversation this morning. First, as was widely expected, Prime Minister Abe announced an 18-month delay in the second phase of the sales tax increase. Next, the PM said he dissolve the lower house of Parliament on Friday and hold snap elections on December 14. And finally, there is talk of - what else - more stimulus after yesterday's surprising dive in GDP as Abe has instructed ministers to begin preparing new measures to help move the economy forward. Across the pond, German and Eurozone ZEW confidence indices rebounded for the first time in five months. And here at home, traders will get fresh data on inflation before the bell. Futures currently point to a flat open on Wall Street.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
    Japan: +2.18%
    Hong Kong: -1.13%
    Shanghai: -0.73%
    London: +0.41%
    Germany: +1.23%
    France: +0.75%
    Italy: +0.89%
    Spain: +1.16%

Crude Oil Futures: +$0.12 to $75.76

Gold: +$16.10 at $1199.60

Dollar: lower against the yen, euro, and pound

10-Year Bond Yield: Currently trading at 2.338%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +0.63
    Dow Jones Industrial Average: +10
    NASDAQ Composite: -0.31

Thought For The Day:

To be able to ask a question clearly is two-thirds of the way to getting it answered. -John Ruskin

Positions in securities mentioned: None

Wishing you green screens and all the best for a great day,

David D. Moenning
President, Chief Investment Officer
Heritage Capital Research
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