MARKET STRATEGIST
josh@cityindex.com

Q. Dear Josh, do broker recommendations fundamentally move stock prices?

A. In the short term, certainly. It’s quite common for a mainstream broker or investment bank like Morgan Stanley or Citigroup to revise their forecasts on certain share prices and see a knee-jerk reaction in the markets.

Last week we witnessed a perfect example of this with Sainsbury share prices outperforming its sector on the back of an upgrade from UBS. Undoubtedly, there will be movements in various share prices this week on the back of broker recommendations too. There is less traction in medium- to long-term share price moves, however, because the fundamentals win out over time no matter who has recommended what.

Moreover, much depends on the nature of the revision itself. An aggressive cut or downgrade to a “sell” recommendation could ultimately have longer-term implications on other market opinions than a more modest revision. But be careful if you are trying to trade on the back of a broker recommendation as much of the knee-jerk reaction in the market is likely to be priced in by the time you have heard about it.

Q. Dear Josh, can you explain why Japan has intervened to weaken the yen?

A. The dollar-yen currency rate reached a new 15-year low earlier this week of ¥82.85. Compare this to over three years ago when $1 bought as much as ¥124 and you can see just how significantly the yen has strengthened against the US dollar. This is posing a massive risk to Japan’s export capabilities, which it relies on for growth, as essentially it makes their goods much more expensive to buy for its global partners.

In the current fragile economic climate, this can exacerbate an already troublesome situation. Devaluing the yen is one way of making Japanese exports more attractive and their intervention to sell an estimated ¥1 trillion last week was Tokyo’s step towards reaching this goal.

Now, the big question is whether Japan’s efforts will work and there are already strong opinions in the marketplace that it is likely to fail until there is a coordinated effort from the other key central banks to weaken the yen.

Currencies work in pairs and therefore for the yen to weaken there needs to be an opposing willingness to allow the dollar to strengthen, and this could ultimately impact the US’s own export desires, making American goods more expensive. Given that Japan has acted unilaterally against agreements with its trading partners, I suspect that there will be much more to come on this matter, both from the markets and on the political front.

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