Portfolio adjustments dominate the severe fluctuations in the Japanese market
2024-08-07
■ Behind the significant appreciation of the Japanese yen and the sharp decline in the Japanese stock market is the behavior of foreign investors affected by concerns about a sharp economic slowdown in the United States
■ Despite receiving positive reviews for the US ISM non-manufacturing sentiment index in July, the unstable period will continue with the arrival of the sluggish summer market
he volatility in the Japanese market has become significant. As of August 5th, the Nikkei average index has fallen 6.21% year to date and has dropped 25.85% from its historical high on July 11th. On the other hand, the S&P 500 in the United States has risen by 8.42% year to date and has only fallen by 8.53% from its historical high on July 16th. In the foreign exchange market, the Japanese yen has appreciated significantly, with the US dollar falling from a high of 161.99 yen on July 3 to a low of 141.66 yen on August 5, a drop of about 20 yen within a month.
Although the whole picture is unclear, the recent appreciation of the yen and the sharp decline in the Japanese stock market are mainly caused by position adjustments led by foreign investors. The overwhelming factor may be the trigger of the 'Sam's Rule' triggered by the rising unemployment rate in the United States. The US unemployment rate rose to 4.3% in July, with an average of 4.13% over the past three months. The result is that compared to the lowest value in July last year (3.6%), the difference has reached 0.53%, exceeding the threshold of 0.50% in the "Sam's Rule". The concern about a sharp slowdown in the US economy has rapidly increased, and expectations of a hard landing for the US economy have emerged. Most investors have been using a soft landing of the US economy as their main scenario this year, thus reducing the risk of holding positions and causing market volatility.
In fact, according to data from the US Commodity Futures Trading Commission (CFTC), the non-commercial sector, which reflects some speculative trading, set a record for the most significant net selling position in Japanese yen as of July 2 (about 184000 positions). Still, as of July 30, it dropped to about 73000 positions. After the appreciation of the yen, the selling position of the yen may be further compressed. In addition, since the beginning of the year, foreign investors' trading volume in Japanese stocks (spot, significant markets of the Tokyo Stock Exchange) as of the end of June was a net purchase of approximately 4.5 trillion yen. With the recent sharp decline in the Japanese stock market, these net buying positions may have been correspondingly liquidated.
Although the improvement in the US ISM non-manufacturing sentiment index released in July eased concerns about a sharp slowdown in the US economy for the US dollar against the Japanese yen, speculative yen selling positions have correspondingly decreased, considering the significant decline in the Japanese stock market, it is necessary to pay attention to the progress of foreign investors' foreign exchange hedging investment positions in Japanese stocks. Suppose the valuation loss of Japanese stock investment increases or is accompanied by selling positions to offset foreign exchange hedging. In that case, trading in the direction of yen appreciation may occur regardless of the level of the US dollar against the Japanese yen. Therefore, in the short term, domestic demand should pay attention to market risk sentiment and the movements of foreign investors. In addition, due to the summer market downturn, the financial market may continue to be unstable.
■ Despite receiving positive reviews for the US ISM non-manufacturing sentiment index in July, the unstable period will continue with the arrival of the sluggish summer market
he volatility in the Japanese market has become significant. As of August 5th, the Nikkei average index has fallen 6.21% year to date and has dropped 25.85% from its historical high on July 11th. On the other hand, the S&P 500 in the United States has risen by 8.42% year to date and has only fallen by 8.53% from its historical high on July 16th. In the foreign exchange market, the Japanese yen has appreciated significantly, with the US dollar falling from a high of 161.99 yen on July 3 to a low of 141.66 yen on August 5, a drop of about 20 yen within a month.
Although the whole picture is unclear, the recent appreciation of the yen and the sharp decline in the Japanese stock market are mainly caused by position adjustments led by foreign investors. The overwhelming factor may be the trigger of the 'Sam's Rule' triggered by the rising unemployment rate in the United States. The US unemployment rate rose to 4.3% in July, with an average of 4.13% over the past three months. The result is that compared to the lowest value in July last year (3.6%), the difference has reached 0.53%, exceeding the threshold of 0.50% in the "Sam's Rule". The concern about a sharp slowdown in the US economy has rapidly increased, and expectations of a hard landing for the US economy have emerged. Most investors have been using a soft landing of the US economy as their main scenario this year, thus reducing the risk of holding positions and causing market volatility.
In fact, according to data from the US Commodity Futures Trading Commission (CFTC), the non-commercial sector, which reflects some speculative trading, set a record for the most significant net selling position in Japanese yen as of July 2 (about 184000 positions). Still, as of July 30, it dropped to about 73000 positions. After the appreciation of the yen, the selling position of the yen may be further compressed. In addition, since the beginning of the year, foreign investors' trading volume in Japanese stocks (spot, significant markets of the Tokyo Stock Exchange) as of the end of June was a net purchase of approximately 4.5 trillion yen. With the recent sharp decline in the Japanese stock market, these net buying positions may have been correspondingly liquidated.
Although the improvement in the US ISM non-manufacturing sentiment index released in July eased concerns about a sharp slowdown in the US economy for the US dollar against the Japanese yen, speculative yen selling positions have correspondingly decreased, considering the significant decline in the Japanese stock market, it is necessary to pay attention to the progress of foreign investors' foreign exchange hedging investment positions in Japanese stocks. Suppose the valuation loss of Japanese stock investment increases or is accompanied by selling positions to offset foreign exchange hedging. In that case, trading in the direction of yen appreciation may occur regardless of the level of the US dollar against the Japanese yen. Therefore, in the short term, domestic demand should pay attention to market risk sentiment and the movements of foreign investors. In addition, due to the summer market downturn, the financial market may continue to be unstable.