Japan’s Nikkei dropped 7.3% in yesterday’s trading after rising almost uninterrupted by 80% over the past several months. The drop has shocked many investors, but some investors had already been taking their profits. Hedge Funds have already started to unload Nikkei say analysts at SocGen in a new report with that title. According to data compiled by the firm, Hedge Fund investors have backed the Nikkei since it began rallying in November 2012. Although net long Nikkei positions are already beyond their peak, Hedge Funds still represent nearly one-third (32%) of total open interest, hence their impact remains relatively strong.
Nikkei time for a pause – But while Hedge Fund’s net positions are still significant, momentum has begun to falter. Indeed, in the three weeks since 23 April, Nikkei positions have stopped strengthening. With the index now matching previous highs in US dollars, many think the Nikkei is in need of a breather.
What Caused the Nikkei to fall?
Following and uneventful morning session, both bonds and stock markets tumbled in afternoon trading, in addition to which there were no new incentives of any major significance. One possible explanation is that it took half a day to digest the results of Bank of Japan’s monetary policy meeting, or investors were spooked by China’s weak PMI numbers.
The Bank of Japan concluded its two day monetary policy meeting today in which Prime minister Shinzo Abe offered an upgraded outlook noting that the economy “has begun to pick up”. The meeting has also reinforced the quantitative easing started last month as the BOJ pledged to double its monetary base over the next two years through bond buying at an estimated ¥60 to ¥70 trillion annually in an effort to stem decades of economic stagnation. The Nikkei has continued to climb reaching a five and a half year high closing today at the 15,627 level representing a one year return of over 80%.
However, analysts at BAML believe what happened is that short-term investors had been waiting for the right opportunity to lock in profits. With more and more individual investors getting involved, conditions may have prompted the market to temporarily move in essentially one direction.Nonetheless, the BOJ likely did not want such a rash sell-off, which has sparked news fears around the globe.
Further reading Richard Koo: Japan’s Tactic Of Lying ‘Has Succeeded Brilliantly’