Whenever Juncker is lying, or Goldman openly commands the muppets to buy, you know the situation is serious, and Goldman has a lot of unwinding to do. Which is precisely what just happened following the Squid’s reco to buy Nikkei September futures (NKU3) ahead of the BOJ meeting. What is Goldman’s thesis in a nutshell: hope may be fading in Abenomics, but the “incentives for Governor Kuroda to use the [upcoming BOJ] meeting to signal a firmer and clearer commitment to the easing course, and to highlight the potential to do more, are high and rising.” In other words, please bet the farm on more of the same jawboning that lead to a 20% loss for anyone who bought as recently as 2 weeks ago. Oh, and by the way, complete the sentence, whenever a client is buying from a Goldman flow trader, the Goldman flow trader is [____].
Trade Update: Go long Nikkei September futures (NKU3) ahead of BOJ meeting
After a sudden decline of nearly 20% from May highs, the NKY is now back to levels that had prevailed before the April 4 BOJ meeting, when massive quantitative easing was announced. Beyond a very large unwinding of positions, the fundamental worry – to the extent that there is one – is clear: the market has backtracked significantly on its belief in the commitment and efficacy of BOJ policy. Nervousness over local bond market volatility, amplified by concerns about Fed tapering, has raised fears about whether QE policies can be effectively delivered. We think those fears are overdone and are recommending long positions in Nikkei September futures (NKU3) with a target of 14,500 and a stop on a close below 12,700.
With the April BOJ “boost” almost fully unwound, we think that the market is underpricing the scale of the policy shift. While implementation is risky and success ultimately not assured, the risk reward from positioning for easing expectations to ramp up again is attractive, particularly against the backdrop of the upcoming BOJ meeting. Our central expectations for Tuesday’s BOJ meeting are relatively modest – we expect the term period for fund-supplying operations against pooled collateral will be extended to two years. But the incentives for Governor Kuroda to use the meeting to signal a firmer and clearer commitment to the easing course, and to highlight the potential to do more, are high and rising.
On the macro side, we have analyzed the impact of Japanese monetary policy shifts by looking at the levels of inflationary expectations as implied by the FX market and how success in lowering real rates through those channels flows to other asset markets (see Global Economics Weekly 13/13: ‘The market consequences of the BoJ regime shift’, April 10, 2013). On those measures, 30-year market inflation expectations have dropped below 60bp, levels also not seen since before the last BOJ meeting and down from a peak of more than 1% in May. Based on these measures, on the way up the equity market did overshoot other markets in mid-May and so the subsequent damage there has been particularly large. But if anything, Japanese equities now appear somewhat “cheap” to where FX and rates are trading, based on this analysis.
From a Strategy perspective, Kathy Matsui’s more neutral short-term view of Japanese equities was based, in part, on the pace of the run-up. However, beyond that, our Portfolio Strategy team remains firmly bullish over longer horizons. Moreover, the sharp selloff took the TOPIX below our 3-month target and well below our 12-month target of 1,400 (our Nikkei-equivalent target is 17,000), and so the medium-term picture remains supportive.
Beyond Japan, our view is that fear of Fed tapering has also been excessive. And with our Global Leading Indicator (GLI) heading tentatively into Expansion territory, even as markets head lower, we think the opportunities to take on more cyclical risk in general are rising again. The risks are that the BOJ does too little to regain market confidence or that position adjustments have further to run. But we think the risk-reward has improved considerably
Now the only reason we are not all in short on the Nikkei following this plea to buy whatever NKU3 Goldman’s flow is selling, is that Tom Stolper did not endorse the recommendation.
As for the final outcome…