Perusing the performance of overseas markets early this morning the weakness in Japan’s Nikkei (down 2.4% on the session) stuck out like a sore thumb. The Nikkei is down on the year after being up nearly 20% at its recent highs. With all the focus on China, even the Hang Seng (up 3.3%) and the Shanghai Composite up (2.9%) are still up on the year. So what’s going on in Japan?
Luckily for me and you, our main macro at The Ticker District, Brian Kelly had some thoughts this morning, Why Japan is More Important than China and the FED Combined:
Markets are waiting breathlessly for China to “stabilize” and the FED to “normalize”, but there is one country that could have a much bigger impact on portfolios. That country is Japan. In a world with a bubble in central banking that features central bankers as the new activist investors, Japan has emerged as the reigning champion of monetary stimulus. More importantly, investor confidence (or lack thereof) in the Bank of Japan is a key indicator of the health of the activist central banking bubble. Recently there have been signs that confidence is failing.
As for the longer term, the recent pullback places the index right above the trend line from the start of the late 2012/2013 QE rally. 16,000 seems like a fairly logical target in the near term:
Like many U.S. index etf’s, the Wisdom Tree Japan Hedged etf (DXJ) overshot on the morning of August 24th, making a new intra-day 52 week low before bouncing:
That’s a pretty tidy trading range in the near term, some fairly important technical support down at $46, and what should be staunch resistance at $54, the level the etf broke down from in mid August. Implied volatility is near multi-year highs, but realized vol (how much the underlying is moving) is actually higher than short dated options. This could offer a near term trading opportunity:
As Brian mentioned:
Japan’s debt load is so large and interest rate sensitive that it would take only a modest increase in rates to bankrupt the country. If you thought Greece created market turmoil, wait until Japan runs into problems –it’s Greece on steroids.
This has ramifications all across the globe but obviously Japan is the easiest place to start with a trade. The BOJ meets on September 15th and that seems like a trade-able catalyst. Stay tuned.