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23 May 2013
Flash: Japanese equities plunge. Investors on edge over QE3 - BTMU
FXstreet.com (Barcelona) - Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ notes that increased volatility was notable so far today during the Asian trading session with the Japanese yen joining the dollar in strengthening as risk aversion takes hold.
He notes that although Chairman Bernanke gave a dovish slant in his JEC testimony by stressing the risks associated with a premature end to QE3, there was also nothing in his testimony to contradict the growing market belief that QE3 may start to be tapered later this year, possibly in September or October. Halpenny sees that the FOMC minutes, released after that, then revealed “a number of participants” would consider starting tapering at the next meeting which led to a 14bp spike in US Treasury yields yesterday with the 10-year yield breaking back above the 2.00% mark. He adds, “The JGB 10-year yield then surged and hit the 1.0% level today but has since retraced as Japanese equity markets plunge.”
Further, he notes that the Nikkei 225 closed 7.3% down on the day with all sectors sharply lower on the day – the Financial Index is 10% lower in part over the increased volatility in the JGB market. He writes, “We all really shouldn’t be too surprised with this. The decision of the BOJ to undertake such an unprecedented amount of asset purchases is inevitably going to result in increased volatility. The Nikkei 225 is 80% higher since mid November 2012 when the speculation about policy changes in Japan intensified. Massive gains on this scale will not be without episodes of volatility as market players lock in profits.”
He also believes that there are certainly implications for the yen also in that foreign investors over the same period have bought just over JPY 10trn worth of Japanese equities – with these purchases probably close to fully hedged, any sharp declines in the value of these holdings would leave foreign investors overhedged, resulting in the unwind of yen short positions. He writes, “Add to that the fact that increased volatility doesn’t help risk appetite and we may continue to see limited evidence of capital outflows from Japan. The latest weekly cross-border flow data to 17th May, released today, showed a net portfolio inflow to Japan totalling JPY 2,231bn. This upturn in volatility leaves the yen vulnerable to further near-term strength.”
He notes that although Chairman Bernanke gave a dovish slant in his JEC testimony by stressing the risks associated with a premature end to QE3, there was also nothing in his testimony to contradict the growing market belief that QE3 may start to be tapered later this year, possibly in September or October. Halpenny sees that the FOMC minutes, released after that, then revealed “a number of participants” would consider starting tapering at the next meeting which led to a 14bp spike in US Treasury yields yesterday with the 10-year yield breaking back above the 2.00% mark. He adds, “The JGB 10-year yield then surged and hit the 1.0% level today but has since retraced as Japanese equity markets plunge.”
Further, he notes that the Nikkei 225 closed 7.3% down on the day with all sectors sharply lower on the day – the Financial Index is 10% lower in part over the increased volatility in the JGB market. He writes, “We all really shouldn’t be too surprised with this. The decision of the BOJ to undertake such an unprecedented amount of asset purchases is inevitably going to result in increased volatility. The Nikkei 225 is 80% higher since mid November 2012 when the speculation about policy changes in Japan intensified. Massive gains on this scale will not be without episodes of volatility as market players lock in profits.”
He also believes that there are certainly implications for the yen also in that foreign investors over the same period have bought just over JPY 10trn worth of Japanese equities – with these purchases probably close to fully hedged, any sharp declines in the value of these holdings would leave foreign investors overhedged, resulting in the unwind of yen short positions. He writes, “Add to that the fact that increased volatility doesn’t help risk appetite and we may continue to see limited evidence of capital outflows from Japan. The latest weekly cross-border flow data to 17th May, released today, showed a net portfolio inflow to Japan totalling JPY 2,231bn. This upturn in volatility leaves the yen vulnerable to further near-term strength.”