Let’s analyze the likely effects of the Japan Government Pension Investment Fund (GPIF) reallocation result a little bit better, there are generally a lot of market moving data coming around here in blocks. The equity market scramble has died down a bit and the Nikkei 225 futures seem to have been consolidated around 16 800, but the market opening in the US will be… interesting!
- The new GPIF target weights will be 35% for Japan Government Bonds (JGBs), 25% each for domestic stocks and foreign stocks as I have already mentioned, and 15% for foreign bonds. Between these, 5% can be allocated to alternative investments such as hedge funds, ETFs, PE/VC, Japanese Real-Estate Investment Trusts (J-REITs) and so on.
- Prior target weights were 60% for JGBs, 12% each for domestic and foreign stocks, 11% for foreign bonds and the balance of 5% in a separate alternative investments section.
- Because of the relatively massive allowance for deviations from the targets that the GPIF is allowed, the actual weights of the asset allocation had been somewhere in the region of 53.4% for JGBs, 17% for domestic equities and 16% for foreign stocks, and slightly above-target for foreign bonds, but rounded to target here.
Let’s look at the non-foreign stock implications then!
And, more stimulus! The BOJ decided to really fire-hose the economy with liquidity in stepping up yen monetary base (see more on the effects on the Hong Kong equivalent here) expansion targets from 60-70 trillion to 80 trillion. On top of that they’ve also decided to add other, riskier assets like ETFs, REITs and such to their purchase basket, and most importantly in showing where they want to take the economy they are also making the JPX Nikkei Index 400 eligible for purchases.
Added to this is a Nikkei newspaper report that the Japan GPIF will increase local and foreign stocks to 25% weight allocation each, later confirmed. Japan is slowly going long equities and very, very short its own currency! Trade data being influenced by the yen probably won’t be as important for Japan, looking into how small of a fraction of their economy is made up of total trade, and in fact total trade only makes up roughly 10% of foreign exchange reserves, so targeting domestic policies is the good thing, irrespective of whether it really shifts trade significantly. Japan is simply not that sensitive to foreign trade and terms-of-trade changes!
What I wonder is, why was everyone so surprised by this? We had many more analysts expecting easing four weeks ago, and on the rationale that the BOJ needs to support the economy ahead of a tax rise, yesterday’s consumer spending data and underlying energy deflation isn’t really helping the 2% inflation target. How come the world’s collected analysts simply put their hats away and stimulus-analysts doing a 180 here when getting data that supports their ideas? Awkward…
So how is the world reacting to this?
Good GDP data came out of the US, but it seems as if it didn’t really bite fully until 3-4 hours later when a massive impulse sent markets globally at least 1% higher. The Nikkei futures saw a 1.27% rally in 75 minutes! Whoa! The yen also seems to be the major currency market shakeout since the yen crossed weaker than 109 to the dollar, providing some additional value to the Nikkei. Still, when quantitative easing starts to not be as important, good news can be good news for once, and it feels like it’s been forever that said rationality mirrored reality.
Before I start sounding like a street peddler trying to push the Nikkei on you, it might be time that I enlist the help of Bloomberg which last morning covered the analyst estimates of how much the Japan Government Pension Investment Fund will increase their equity weights to. As discussed in the article, it would have a great effect on the market, but it currently looks like the Nikkei is a bit too close to the range top of 16 400 points (500 – 600 points away) for the fund to go in at these levels unless better fundamental data is on the way. What’s the case for that?
The Federal Reserve came out and said that they should stop stimulus in the form of QE, which lightly shook markets up. It now takes 1 more yen to buy a dollar, and most currencies seemed to have a 0.6-1% swing weaker against the dollar, but little is seen so far in the equity markets. Sure the Nikkei is up a bit and most others down-to-flat from the Fed decision, but nothing world-changing. This too shall be shaken off, and given the rather spectacular rallies this week across most global indices I would have expected a greater pullback and volatility than what amounts to a shrug of the shoulders.
More interesting instead is revisiting Hong Kong non-bank financial institution (NBFI) liquidity that is sponsored by the HKMA. I tested this data for co integration with the HSI last night and got some great results on this chart:
- The series are most likely cointegrated, with a p-value of still having a unit root in regression residuals of 1.584%.
- The relationship between the non-bank OEFBNs and the HSI is negative as the chart yesterday would describe, with a fall of 13.92 HSI points for every HK$ billion of OEFBNs that non-bank financial institutions hold.
- The regression model is rather good, but given the stationarity of the individual factors spurious regression is too much of a worry with an adjusted R^2 of 0.2182.
- The cointegration lag order term is 8, indicating that it takes eight business days for changes in the non-bank OEFBN value to filter through to the HSI.
- Individual differenced series have less unit root probability so day-trading on this might be problematic, but over a longer period of time this should not be a fundamental concern.
This indicates that short-term, consistent changes in NBFI liquidity only goes out to eight days for prediction power over the HSI. If it influences trends in other ways, daily changes are not time-consistent in their impact and thus become very difficult to model. My interpretation would be that NBFIs can thus transact with relatively active traders or investors – of whom a majority follow the trend – for up to eight days before the market reverses the trend.
For those not familiar, below is a quick recap of cointegration methodology. In addition, I will also note a few technical things about the HSI so far today and yesterday.
To tide you over a bit before the massive data drop by the Federal Reserve in a bit more than an hour, I have some more data on the Hong Kong monetary impact on general market conditions!
Although all types of statistically problematic, the Other Exchange Funds Bills and Notes not held by HK monetary system participating banks seems to have a rather nice little qualitative relationship with the HSI as can be seen in the chart below:
Liquidity held at non-monetary system banks a) is moving the opposite direction to the HSI performance, and b) has a lead of between 1 and 3 months!
Yes, there are periods where the values are co-moving, but the majority of the movements tend to be in opposite directions. This could be pretty easy to explain: financial institutions simply use their HK$’s of liquidity to buy equities, and the lag could be explained by allowing other actors to off-load shares at lows and buying into them at peaks. This is of course all speculation on my part, but it is an interesting chart, particularly for co-integration purposes and fundamental money management given data bursts. It would also indicate that banks might have been buying recently!
Ready for more quantitative takes on Tuesday’s data dump? More after the jump!
The last few days of data have been largely very good for Japan. Yesterday we got retail sales being very positive, and today it’s total economic output at 2.7% rather than 2.2% as expected. Retail was probably the better thing, after all people buying their way to economic growth is a good thing in Japan (I don’t have the same heartthrob for consumption globally as all American pundits, but in China and Japan I believe there exists large benefits and potential for increasing the value of spending to get velocity of money going). Now if Bloomberg could just stop yapping about the sales tax hike in April and the ‘horrid, horrid’ effects that had on the economy when the effects were less than expected and a pretty natural cause of a pre-hike consumption spree things would be good. (And one of your editors was even out on bad math yesterday evening, geez…)
Then, is it time to buy?
This would be funny if it wasn’t so tragic. (There’s probably an Ibrahimovic joke somewhere in here but I’m neither happy nor into football.) The direction of this current move by the Swedish Riksbank (central bank) to lower the repurchase rate by 25 basis points to 0 basis points basically puts Sweden in zero interest rate policy – ZIRP!
What is the outside curve ball that makes it so particularly sad? Well we have a treasurer who’s been campaigning on lunacy, and who now has manged to paint herself into a corner. Swedish news are covering this story as it develops, and all the details are pretty grim:
- Swedish exports are doing ok, but local consumption and investment has been really low as of late.
- Consumer price inflation has thus been rather low.
- One can only draw the conclusion that the domestic velocity of money is decelerating when the quantity of products traded (GDP) is growing.
- Household debt, particularly for those who
own rent their house from the bank, is unsustainable with levels of consumer debt at 180% of disposable income and 112% of GDP (low estimate using 2012 personal income data but current GDP per capita figures, probably somewhere between 115-120% of GDP in actuality).
Let’s recap the policy proposals by the current finance minister in the electoral lead-up and following her latest budget proposals in ruling power: