Daily Commentary

MarketMinder’s View: We bring you this with the giant caveat that the agreements in question were sealed before the Supreme Court struck down President Donald Trump’s blanket and reciprocal tariffs Friday morning, raising questions about the validity of all the trade deals where countries received lower rates in exchange for various investment and trade commitments. Setting that aside, we are starting to get some clarity on what some of these pledged investments will entail. Not just what the projects will be, but where the investment is coming from. In Japan’s case, three new projects have now come to light as part of the $550 billion in investment commitments agreed to in last year’s deal: a gas-fired power plant in Ohio, a crude oil export terminal in Texas and a synthetic diamond manufacturing facility in Georgia. All will be overseen by Japanese companies, and as for funding and profits: “To execute the three projects, Japan and the United States will establish a special purpose entity. The Japan Bank for International Cooperation will provide funding, while three major Japanese banks will extend loans with a loan guarantee from Nippon Export and Investment Insurance. The U.S. side will contribute land and other tangible assets, while the U.S. federal government will help with construction permits and approvals. Profits from the projects will be split 50-50 between Japan and the United States up to the amount covering Japanese loans and interest, and 90% of any profits beyond that will be received by the United States and 10% by Japan.” The article mentions several of the companies involved, and as always, MarketMinder doesn’t make individual security recommendations. We highlight this for the broader theme, which is that gradually falling uncertainty remains a tailwind even if these deals are unlikely to move the needle for either country’s economic growth.

MarketMinder’s View: This is a link wrap type thing that includes some individual stocks in some of its later nuggets, so we remind you MarketMinder doesn’t make individual security recommendations, and we are bringing it to you solely for the short article that leads it off. This makes an argument near and dear to our hearts: There is no such thing as cash on the sidelines flooding into stocks, and the $7.7 trillion in money market funds isn’t dry powder just waiting to rocket stocks higher. This is principally because for every buyer, there is a seller. “The next time a pundit cites [cash on the sidelines] as a positive factor, though, ask them what happens with cash when it runs onto the metaphorical field? If Peter has $1,000 in his money-market fund and decides to buy four shares of IBM with it, someone else has to feel like selling. Say it’s Paul, who now has that $1,000. The same amount of money is ‘on the sidelines.’ It could go into a checking account instead—there’s cash in those, too—but no net money ‘went into’ the market.” Plus, the reason why people hold cash matters, too. Chances are, not all of that $7.7 trillion is something people want to expose to higher risk of loss. We have some quibbles with some of the examples used here, but it makes the general point: “When short-term interest rates are artificially low, conservative people might choose to take slightly more risk and lock in higher rates through bond funds. Others allocate more to stocks. Those who already own a lot of shares might choose riskier ones with more-distant and less-certain payoffs—speculative, unprofitable companies.” Heck, a lot of that money is in money market accounts because people sought higher-paying alternatives to bank accounts. If their time horizon for that money is short and they can’t expose it to volatility, it isn’t going into stocks (where, again, it wouldn’t push up prices anyway).

MarketMinder’s View: We are two thirds of the way through the month, and you know what that means: Flash Purchasing Managers’ Indexes (PMI) from S&P Global are out! Hip hip hooray! And the PMI for Japan, produced with au Jibun Bank, showed manufacturing rising to 52.8 from January’s 51.5 and services up from 53.1 to 53.8 (readings over 50 indicate expansion). “The surveys highlight underlying strength in Japan’s recovery even as some recent indicators have suggested otherwise. Factory production rose at the most pronounced rate since January 2022, while service providers saw new orders expand at the fastest clip in 22 months, S&P Global said. The expansion of business activity was the quickest rate in 33 months, it said.” This follows a Q4 GDP report that was fine but not great, suggesting the recovery from last year’s dips is broadening out. This article argues this puts new Prime Minister Sanae Takaichi on a stronger footing as she prepares to pursue tax cuts, investment incentives and other fiscal stimulus, which we can see—to a point. Given her Liberal Democratic Party now has a super majority in the lower house, we doubt she needed a good PMI report to underscore her political capital. But there are rampant concerns about stimulus raising the deficit. To the extent broader growth lifts tax revenue, deficit fears might ease a bit, helping sentiment warm.