The Chinese market didn’t react as bad as we feared and with the weak export data there is some big hope that he central banks will react quite fast… It’s a mix of hope of intervention from the Asian central bank, short squeeze and also a relief in some energy and banking sectors, the most shorted sectors.”
Below, as a follow up to this summary, is SocGen’s Andrew Lapthorne who looks at the unprecedented volatility in the Nikkei, observes that “The market, today, is clearly hoping the authorities will step in” and concludes that in a world of unintended consequences, what NIRP has done is precisely the opposite of QE’s effect: “whilst QE typically pushed investors out of bonds into riskier assets, negative interest rates could potentially do the exact opposite. Little wonder 30 year sovereign bonds are one of this year’s standout performers. Welcome to the world of unintended consequences.”
His thoughts:
Whilst the Nikkei 225 put in one of its strongest daily performances today, rising over 7%, the 16% collapse in Japanese equities over the 9 days preceding this bounce was equivalent to that seen in the 1987 crash and perhaps more poignantly the “Nixon Shock” of August 1971 when Richard Nixon cancelled the direct convertibility of the United States dollar to gold. This amongst other things, led to the floating and subsequent substantial appreciation of the Yen. Only in 2008 in the aftermath of the Lehman crisis has the Nikkei 225 fallen so much in such a short amount of time and the Yen’s sharp appreciation versus US dollar over those 9 days is also similar in magnitude to that period. The effect then was to send Japanese profits into an aggregate loss, a far worse outcome than Europe or the US.
We have been relatively upbeat about Japan on the basis that its corporates were benefitting from a much weaker currency and that that weakness was to be maintained via continuing BOJ QE. We were also of the view that by and large Japanese corporates were in relatively good shape and valuations were not as stretched as everywhere else. All they needed was a more competitive currency. So despite the unfolding economic downturn and despite the cyclical nature of the Japanese stock market, we favoured Japan over the likes of Germany. We were certainly not alone in such a view. But now with the introduction of negative rates and the subsequent rise in the Yen, are the Japanese authorities, once again, about to snatch defeat from the jaws of victory, as has happened so many times in the past? The market, today, is clearly hoping the authorities will step in. Maybe abandoning negative rates would prove a sensible first step?
One irony of negative interest rates (and there are plenty of negatives as Edward Chancellor points out in his BreakingViews column this week), is that it encourages investors to buy not sell sovereign bonds. For whilst interest rates were range bound by zero, bond price upside was seen as fairly limited. But having broken the zero bound taboo, all of a sudden long-term sovereign bonds may have considerable upside, despite yielding next to nothing in the first place. So whilst QE typically pushed investors out of bonds into riskier assets, negative interest rates could potentially do the exact opposite. Little wonder 30 year sovereign bonds are one of this year’s standout performers. Welcome to the world of unintended consequences.
All we can add to this, is if Citi’s Matt King and DB’s Aleksandar Kocic are right, the gut wrenching volatility across all asset classes is just getting started.
