Most of the financial media seems to have been focused on analyzing the effects of the money flow on the GPIF alone. Cool, but you’re still a bit late to the party. Worse yet there is no one asked about the idea of other index participants bench-marking their allocation weights to the GPIF or anyone trying to front-run it, so I can’t really improve my analysis significantly. Bonds overall rose; I guess most traders are simply expecting there to be more buying than the GPIF and tail will be selling. I wonder if these trades are done on the assumption of more or constant monetary stimulus…
What was instead interesting today was this idea: Ask yourself if the Nikkei went up or down today. Bulls will look at the data and say “Of course the market went up, it closed Friday on 16 413 and closed today on 16 862! That’s up almost 3%, buy!” while bears will be of the disposition that “The futures market was in free fall and closed 3% lower than the Japanese overnight high! Sell!” And the scary part is that both are in a way right. The Nikkei 225 has been wobbling about violently with within-hour swings faster than 1% per hour, and around lunch there was a 2% swing inside 30 minutes of trading. It seems like Japanese investors were keen to take profit at about 17 000.
Who could blame them? The Nikkei 225 futures were up 19.4% at 17 200 from an October 17th low of 14 400, so most money managers probably start re-balancing their portfolios a bit. On top of this, there is the problem of Japanese investors potentially choosing to invest abroad when the yen looks set to be in such utter one-sided trading, at one point hitting 114.22 to the US dollar but since finding its footing in the mid-113 range. I guess the next few days of Japanese investor sentiment will really tell the direction of this move and whether it is further sustainable, but as I have mentioned before I think the chips are stacked to the upside. Bloomberg reports on some more delicate data in options probability pricing for the yen which would seem to enforce the massive momentum shift that has happened.
What i found most comical was that this news was old even at the time it came out! Levels at 112 or 113 yen to the dollar were talked about as lines of major defense, and woopie – when it hits the Bloomberg front page the numbers are already past 113.5! When people are making “bold” predictions of the yen at 115 which is reported on a day that the price hits past 114, then obviously the momentum found the news and ran with it, leaving a lot of analysts in the dust.
For lack of better approaches to this, (I’m hunting through BOJ database time series at the moment, hopefully I will get these out this business week) the technical analysis is probably the best we can get. Here, we get the fib level that got enforced at 114.38 but pretty smooth sailing from there to 118 which is the 50% fib retracement on that same chart. Again, a crack at 114.4 would open up a 118-121.7 range virtually immediately given these fundamentals. Whether or not this range will be reached in 2014 however is much harder to guess as I think the market is due for a bit of consolidation and throwing a few feelers out. Here’s the yen chart again for easy reference:
That said, Abe approving the next stage of the consumption tax hike could very likely add “optical inflation” and make a few Japanese front-load consumption in Q1-3 2015 like they did in late 2013 and Q1 2014. History however shows that the 1997 tax hike pushed the yen up, and the tax hike in 2014 was at least not yen negative. Pushing the next tax stage through could very likely add quite a bit of support for the yen. My question in this case is what on Earth makes Abe drag his feet so much on corporate taxation reform? With the BOJ printing like no tomorrow, and businesses and pundits alike hoping for a better local investment climate, wouldn’t it be an easy sweep to do a consumer-to-business tax benefits shift and further stimulate the stock markets in the process?