The Asia Pacific market is experiencing a resurgence!
Although the US stock market closed well last Friday evening, the Japanese stock market did not receive a boost this morning. The Nikkei 225 index fell sharply after opening slightly lower, and the latest decline has expanded to over 1.2%. Meanwhile, the Japanese yen has risen to around 143.
So, why is the Japanese stock market experiencing a sharp decline at this time? Will the Japanese yen carry trade once again impact the market? Analysts believe that there are three main reasons for the sharp decline in the Japanese stock market this morning:
One is the expectation of interest rate reduction. Bank of Japan Governor Kazuo Ueda stated at a parliamentary hearing that the Bank of Japan's basic stance has not changed, and if it is confident that economic and inflation developments meet expectations, the Bank of Japan will continue to raise interest rates. The International Monetary Fund stated that there is still room for the Bank of Japan to raise interest rates.
Secondly, the Japanese yen has surged. After the Federal Reserve released clear expectations of interest rate cuts, the US dollar began to plummet sharply, with the US dollar index falling below 101 and the Japanese yen rising to around 143, just one step away from the exchange rate level when the yen's carry trade reversed.
The third issue is the internal structure of Japanese stocks. In early trading today, Nissan's decline widened to 5.5%, after JPMorgan downgraded its rating to low-end.
Unexpected events in the Japanese market
Last Friday, Federal Reserve Chairman Powell stated at the Jackson Hole Conference that the time for policy adjustment has arrived. Immediately, the capital market underwent a major change. The US stock market has launched a significant counterattack, and the US dollar has fallen sharply. The swap market expects the Federal Reserve to cut interest rates by nearly 100 basis points before the end of the year. The inverted range of the yield curve of the US two-year and 10-year treasury bond bonds narrowed.
This situation corresponds to the collective surge in the Asia Pacific market this morning, but it is not the case. In early trading today, the Japanese stock market opened slightly lower and then continued to decline, with the Nikkei 225 index rapidly expanding its decline to over 1.2%.
At the same time, the US dollar continued its downward trend against the Japanese yen, falling 0.61% at one point to 143.49, and then oscillating at a low level. It is worth noting that in early trading today, except for the Japanese yen, the overall performance of Asia Pacific currencies remained stable and did not experience the expected surge. The sharp rise of the Japanese yen is probably related to the sharp decline of the US dollar. Last Friday, the US dollar index fell 0.82% and has already fallen below the 101 key level.
In addition, the South Korean stock market did not show a significant decline in early trading. So, what exactly is the trend of the Japanese stock market like this?
Analysts believe that JPMorgan analysts stated in a report that trend hedge funds have reversed their bearish views on Japanese stocks and started buying later last week. Hedge funds with CTA strategies may have resumed their positions in Nikkei 225 futures and the CSI stock index futures since around August 15th. Previously, Masanari Takada, Global Quantitative and Derivatives Strategist at JPMorgan, stated that as of August 9th, CTA is expected to have sold approximately 50% of its long positions in Nikkei futures. This is one of the main reasons for the sharp decline in the Japanese stock market. And as the Japanese yen appreciates again and rises to near its high point during the sharp decline, CTA may be selling again.
In addition, there are also issues with the internal structure of the Japanese stock market. Previously, JPMorgan downgraded Nissan's rating from "neutral" to "underweight" and lowered its target price from 560 yen to 330 yen. Analysts said that the reason for the downgrade is the company's weak US business and reduced profit risk in the coming years. In early trading today, Nissan fell by 5.5%.
Interest rate direction in Japan
Recently, there is a view that Japan may not raise interest rates again this year. However, the current expectations are still vague.
On August 23rd, Kazuo Ueda stated at a hearing in the Japanese Diet that the Bank of Japan's basic stance has not changed, and if it is confident that economic and inflation developments meet expectations, the Bank of Japan will continue to raise interest rates. The short-term interest rates in Japan are still very low, and if the economic situation is good, interest rates will rise to what we consider a neutral level. "Kazuo Ueda said at the hearing that there is still great uncertainty about the final level of interest rates in Japan. However, he also stated that the Bank of Japan will closely monitor the impact of unstable financial markets on inflation and is not in a hurry to push for the next interest rate hike.
On the other hand, the International Monetary Fund (IMF) has stated that there is still room for the Bank of Japan to raise interest rates. They can gradually increase interest rates, as the strengthening of inflation expectations leaves further room for the normalization of their ultra loose monetary policy. The speed of further interest rate hikes in Japan will depend heavily on data, and the Bank of Japan will pay attention to the rate of wage growth and inflation expectations during the policy normalization process. We expect that as inflation expectations remain stable at a new level close to 2%, the Bank of Japan will begin to normalize policy rates, "IMF Chief Economist Pierre Olivier Goulins said last Friday
However, regardless, the September rate cut of the US dollar has been basically confirmed. Under this premise, the carry trade function of the Japanese yen may gradually be replaced by the US dollar. Previously, some major international corporations held the same view. In addition, there are also certain opportunities for the equity market. The adjustment of the Japanese stock market with a small decline may not affect the overall situation.
CICC believes that 2019 is a more comparable benchmark scenario. In the 2019 interest rate cut cycle, after the first interest rate cut, the long-term US bond interest rate bottomed out and gold peaked, while copper and US stocks gradually rebounded, rather than waiting until the end of the interest rate cut cycle. This time may also be similar. The denominator asset is the main trading opportunity and has the greatest elasticity before the interest rate cut, and recent performance fully proves this point. However, due to the full inclusion of expectations and the limited magnitude of the interest rate cut, when the interest rate cut is realized, it may be necessary to gradually profit and withdraw, and should not be heavily increased. On the contrary, those molecular assets that benefit from interest rate cuts can choose the opportunity to moderately increase their holdings, as evidenced by the recent gradual rebound of copper and the gradual recovery of US real estate data.