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Global Macro: Japanese Markets Overshoot Expectations

Stocks in this article: NKY VT FXY UUP JGBL

NEW YORK ( TheStreet) -- Weaker U.S. data on Thursday pushed the dollar down and equity markets higher. The belief that the Fed is less likely now to reign in easing because of weaker than expected data has buoyed risk assets.

The fear that U.S. easing could let up has rattled global financial markets as of late and added an element of uncertainty that has been largely absent throughout 2013. Japan too has seen added volatility as global demand has come into question.

Last week, when questions began to rise as to the timeframe of U.S. easing measures, Japan equities saw a sell-off and the yen spiked higher.

The pair below is of MAXIS Nikkei 225 Index ETF (NKY) over Total World Stock Index ETF (VT). Japanese equities have vastly outperformed world markets as the economy pursues drastic monetary and fiscal stimulus. It has been said that irrational exuberance overtook the Nikkei and prices propelled higher, overshooting fair value. A correction was long overdue, and with the introduction of Federal Reserve uncertainty and weaker Chinese data, the Nikkei got its pullback.

The price movement has returned to its trend line, and has not damaged its intermediate uptrend. Japanese policy remains in place to fend off deflation, which should maintain the fundamental thesis of weaker yen and stronger equities.

The next pair is of CurrencyShares Japanese Yen Trust (FYX) over DB USD Index Bullish (UUP). This pair measures the strength of the yen over the U.S. dollar. The yen acts as a safe-haven asset in times of investor fear and got a boost higher as doubt over U.S. stimulus crept into markets last week. The Bank of Japan maintains its simulative policy, and with weaker U.S. GDP and unemployment data, it is unlikely the Fed removes its lifeline just yet. The dollar should continue to show strength with the yen trending lower as stability returns to markets.

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