Well, well… Remember how I was wondering about the incessant relentless bid in the equity market? I think that mystery has been solved. With the gift of hindsight, it is easy to say that a good portion of the buying was probably the Japanese Government Pension Investment Fund (GPIF). Yesterday the GPIF announced that they would be increasing their domestic and foreign stock holdings, while at the same time cutting their domestic bond holdings. The GPIF is the largest fund in the world. And these moves that they made were not shifting 1% or 2% at the edges. No, these were massive doublings of their stock holdings. There is no doubt in my mind that the rally of the past two weeks has in large part been fuelled by the GPIF making their asset shift.
I also believe that the GPIF was confident to go ahead with their aggressive equity purchases because they knew the Bank of Japan was about to embark on another round of monetary expansion. Last night the BoJ stunned the market by increasingly the annual asset purchases to 80 trillion Yen from the previous 60 to 70 trillion Yen forecast. But they also committed to changing the nature of the assets that the BoJ monetizes. The planned purchases of stock ETFs and REITS was tripled.
The market has always had some doubt about Prime Minister Abe’s commitment to his bold economic plan.
There has been a nagging concern that the benefits from his reforms were not bearing enough fruit and that as his popularity waned, Abe would be forced to back off on his monetary expansion.
I have long held the belief that there was only one direction for Japan – towards even more expansion. I did not expect Abe to pull the trigger yesterday, but I did not think that he was about to back off. The one thing that I have learned about the Japanese people is that once they set their mind on a direction, they follow through with a dogmatic determination. Prime Minister Abe, and by extension Japan, is “all in” on their economic plan. They are not going to back off. The plan will be followed come hell or high water.
As for the timing of his recent pushing down on the accelerator, I am kind of at a loss of why now.
It’s not like the Japanese economy was sinking into a morass. The economic numbers were actually coming in a little better than expected. Have a look at the Japanese economic surprise index which measures how much the economic releases are beating or disappointing versus expectations.
The last couple of months have seen this index steadily rising.
The only real plausible explanation of the increasing monetary expansion announcement is that the Bank of Japan was worried about the large fixed income selling from the GPIF asset shift and wanted to ensure that it all went smoothly.
Regardless of why it happened yesterday, our job is to react and adjust based on the new facts.
The USDJPY rate has gone completely ape-shit (a technical term) to the upside (yen weakness).
This is going to be a huge win for the speculators as most everybody has been leaning short Yen.
My trading has been really fluid lately as the volatility has been so large, with new facts shifting the whole playing field seemingly overnight. I was mistakenly leaning towards the belief that the US dollar was due for a decline. I had thought the crowded nature of the trade made for a possibility of a squeeze higher in the currencies. But then yesterday’s GPIF announcement scared me out of a lot of my positions (in fact I once again covered almost everything as nothing seemed to be working). I hedged up my long Yen calls with a corresponding short. That was a lucky development as this morning’s Yen move was massive, which ended up skating me onside. I am not going to look a gift horse in the mouth. I am in essence long Yen volatility. With this BoJ surprise, vol is bid. I am winding it all down – selling my calls and covering my short. Better lucky than smart.
Precious metals – boy am I ever wrong
But I wasn’t so lucky with my precious metals call. To say that it has been horrible is like saying the maiden voyage of the Titanic got off to a poor start.
Yesterday, the precious metals were beaten like a red headed step child and then the Dad woke up this morning and resumed the beating where he left off.
There seems to be no end in sight to the selling. It is a complete free fall.
I am obviously very wrong, so there is really no defending the position. But I do find it ironic that we are getting such a massive sell off into the announcement that the Bank of Japan is increasing their monetary expansion.
The only thing that I will caution is that I have often seen these sorts of moves end on Friday at lunch time. The trend of the week often continues during the morning, with all the traders puking out their positions in an emotional morning move, only to see that mark the end of the move.
Shorting more JGBs
As usual I am running out of time, but I did want to say one more thing. Japanese bonds are bid higher on this announcement. Remember that QE programs are inflationary, and ultimately bond bearish. I am going to crank up my short JGB position into this rally…