MorningWord 12/23/16: Japango

by Dan December 23, 2016 9:42 am • FREE ACCESS

This morning, the WSJ’s Moneybeat column pointed to a market that may get a tailwind from the proposed economic policies of the incoming president and congress —> Another Trump Trade: Japan. The article specifically cited the “Key to the equation is the rising dollar”:

Tumbling currencies tend to be a boon for stocks in export-focused economies, in part because goods become cheaper to foreign buyers in the global market. Japan’s Nikkei Stock Average is up 13% since Election Day, among the biggest gains for any overseas stock market.

Andrew Sheets, chief cross-asset strategist at Morgan Stanley, recently advised clients to sell some U.S. stocks and buy those from Japan, in part because he believes the weak yen will energize overseas buyers of Japanese stocks. What’s more, the Bank of Japan has vowed to anchor the yields of its 10-year government bonds near zero and more interest rate increases from the Federal Reserve in 2017 are likely to put additional pressure on the yen.

“The Japanese market as a whole remains pretty sensitive to yen movement partly because a weak yen tends to prompt index buying by overseas investors that buoys the entire market,” wrote Isabelle Mateos y Lago, global macro investment strategist at BlackRock. “We see further yen weakening ahead, given the Bank of Japan’s new policy settings.”

Year to date the Nikkei doesn’t exactly demonstrate this potential, up only 2%. But the index is up 30% from its post Brexit lows in late June, and two weeks ago going up on the year for the first time, forming a near term base into year end:

NKY 1yr chart from Bloomberg

At this point though, it looks like technical resistance 2,000 points higher near the 2015 highs,with support down about 2,000 near the long term uptrend just above 17,000:

NKY since 2010 from Bloomberg

A few weeks ago we highlighted a roll in upside calls in the DXJ, the etf that track Japanese equities on a currency hedged basis:

DXJ: the etf that tracks Japanese equities on a currency hedged basis saw what appears to be a roll up in calls. When the etf was $49.56 a trader sold to close 16,300 Jan 49 calls at $1.41 and bought to open 16,300 Jan 51 calls for 61 cents to open. This new call position breaks-even at $51.61, up 4% from the trading level in about 6 weeks.  The etf is now back to unchanged on the year, approaching key long term technical resistance at $50:

Short dated options prices continue to tick lower, as the DXJ consolidates within a very tight range. Implied volatility (the price of options – blue below at 52 week lows, and realized volatility, how much the etf has been moving – white below) converging.  Short dated options prices continue to be cheap for those looking to express defined risk directional views in the DXJ: