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Japan pushes markets higher

Markets have continued to rise during the past two weeks, driven by the landslide victory for Japan's ruling coalition in the Upper House election last weekend.

Gains made in Europe, Australia and the US paled in comparison to the 9.2% jump in the Nikkei 225 – the best five-day showing for more than six years.

It now seems likely Japan will roll out aggressive fiscal stimulus along with more quantitative easing to bolster growth and inflation. This is putting pressure on the Yen, with the US Dollar up 4.9% against it last week to ¥105.41.

Expectations are rising that the Bank of Japan will soon announce the expansion of asset purchases under its current policy of Quantitative and Qualitative Monetary Easing (QQE) (perhaps as soon as the end of this month). However, there are doubts the bank will directly finance a game-changing fiscal boost via "helicopter money" as some in the market are speculating.

The ¥10 trillion fiscal stimulus package now being proposed by the Abe government is certainly large at about 2% of annual GDP, but it would not be unprecedented and should assist the economy.

Looking ahead in the US

This week, attention will shift from Japan to the US where we expect markets may get a boost by better economic numbers and earnings announcements.

Earnings season has had an encouraging start, notably from the banking sector. But we also need to see improved earnings in Technology and Energy.

June economic data highlights include:

· Unexpected strength in US retail sales means second-quarter GDP growth appears to be between 2.5% and 3.0% annualised, and real consumption growth should be about 4.0%.

· US core consumer prices increased by 0.2% month on month, which was enough to push the annual core inflation rate back up to 2.3% (from 2.2%).

· The 0.6% month on month rise in US industrial production was primarily because of a rebound in manufacturing output. This included a 5.9% month on month increase in motor vehicle production.

Europe keeps on fighting

So far this year equity markets are down across Europe and financial stocks have significantly underperformed. Italy is suffering, having underperformed the rest of the euro-zone as fears of a banking crisis mount.

Fears in Italy are justified in light of EU rules that make it politically difficult to recapitalise banks in Italy. But we believe Italian policy-makers will find ways to provide support to the banks.

European bank stocks may not drag on equity markets for much longer. We expect there is scope for equities in the euro-zone to recover as tighter than anticipated monetary policy in the US will cause the Euro to depreciate against the Dollar.

Finally, a look at China

Data out of China last week showed that credit is expanding fast enough to support the economy over the next couple of quarters. Indeed, overall credit growth is stronger than the Total Social Financing (TSF) figures suggest. Since the launch of the debt swap programme last year, local governments in China have relied on the bond market rather than off-budget borrowing from banks to raise funds. If you add this to the TSF data, you get a clearer picture of credit growth.

Official economic growth figures in China also held steady at 6.7% year on year in Q2. While China is almost certainly expanding at a slower rate than its official GDP growth suggests, rapid state sector investment does appear to have remained stable.

Finally, growth in industrial production edged up to 6.1% last month and retail sales rose to a six-month high. And although lending data points to a slowdown in aggregate credit growth in June, it should be enough to support economic growth over coming quarters.

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