BOJ Policy Unchanged, Japan Equities Drop Ahead of Gov Ueda Presser
The bulletproof Japan equity rally gets hit - and it has nothing to do with Bank of Japan today.
It is currently AFTER BOJ official policy release, and BEFORE BOJ Governor Ueda’s Press Conference.
Anyone who has followed me for even one Bank of Japan policy release day would know what I would say at this current moment- the time in between when the BOJ policy statement is released, and before the BOJ Governor’s press conference at 3:30pm Japan time (30 mins after market close)
DO NOT READ INTO MARKET PRICE ACTION RIGHT NOW. MARKETS ARE “TRADING” (MOVING) ON PARTIAL INFO. BOJ GOV PRESS CONFERENCE AT 15:30.
-me
And I believe this is the appropriate approach, hence my repeating it time and again.
However, today, I’m going to break protocol in a rare moment, and discuss price action of green and red blinking tickers during this “lame duck” PM trading session.
And why?
Because green and red blinking tickers are on the move, and at this moment, its not Bank of Japan policy driven - its China.
So, here is my live market analysis and commentary- and as always, I wouldn’t be conveying this if it weren’t both relevant and overlooked. But it is - so here is the differentiated angle, separated from the chatter out there.
Tues January 23, 2024 Timeline:
(All times will be in Japan Standard Time UTC +9hrs)
8:45AM - NKY, TPX and JGB Futures open - meander around flat.
9:00AM - Japan Cash Equity Open
NKY225 Index jumps almost +1% in the first 10 minutes of trading, hitting 36800 - that’s now more than +10% on the index from start of the month. ON BOJ MORNING.
In other words, the question should be: WHO in the hell is STILL actively bidding up Japan stocks to multi-decade highs after a +10% start to the year on the morning of a policy meeting??
And the answer is - the capital that is tied to the Long Japan / Short China & HK trade, in all its iterations- likely systematics and CTA type accounts trading index futures and large cap liquid single stocks. This matters, as we’ll soon find out.
Read my BOJ Preview note from earlier this morning if you haven’t yet, as the rest of this won’t make sense without knowing the context of the Long Japan / Short China trade flows:
10:57AM (30 minutes until Japan AM session close, and a BOJ policy announcement)
Bloomberg exclusive headline:
Chinese authorities are considering a package of measures to stabilize the slumping stock market, according to people familiar with the matter, after earlier attempts to restore investor confidence fell short and prompted Premier Li Qiang to call for “forceful” steps.
Policymakers are seeking to mobilize about 2 trillion yuan ($278 billion), mainly from the offshore accounts of Chinese state-owned enterprises, as part of a stabilization fund to buy shares onshore through the Hong Kong exchange link, said the people, asking not to be identified discussing a private matter. They have also earmarked at least 300 billion yuan of local funds to invest in onshore shares through China Securities Finance Corp. or Central Huijin Investment Ltd., the people said.
11:03AM
Immediate reaction- Hang Seng Index is up +3% within minutes.
AND, Japan equities barely react - in fact, it’s surge from AM open fizzles out. Futures trading volume dries up in the last 30 minutes of the AM trading session.
12:09PM - Bank of Japan Policy Statement Released - NO CHANGE to policy (-0.1% negative policy rate remains)
12:10PM - Bank of Japan Outlook for Economic Activity and Prices Released
“The projected year-on-year rate of increase in the CPI (all items less fresh food) for fiscal 2024 is lower, mainly due to the effects of the recent decline in crude oil prices.”
Ok great- so, nothing at all has changed with policy and policy outlook, which is dead in-line with unanimous expectations of no changes. (This is not sarcasm, this is key.)
So, if that is the case, then why do we get this market behavior?
12:39PM (not a market re-open time, not a policy or statement release moment, just an arbitrary 9 minutes after PM open)
NKY and TOPIX Indices suddenly begins to drop sharply led by futures and large cap heavyweight single stocks. NKY index futures drop -1.4% on nearly ¥1tn notional (NKY + NKY Mini futures combined volume) in under 20 minutes
Now - NKY Minis (above) sell off on volume as you can see (NKY Minis have surpassed the large NKY futures contracts in turnover volume years ago - these two are basically the “SPX E-MINIS vs large S&P500 futures” of Japan).
However, on the large NKY futures contracts and on TOPIX futures, the sell off price move is there, but the volume is not.
Intraday trading volumes are dismal on NKY and TPX futures relative to the previous days.
12:57PM NKY and TOPIX stabilize
And a quick cross-asset check shows other markets were not erratically selling off (or rallying) - in either direction.
JPY futures do the standard flash crash and rebound - but stabilize, as SPX Eminis remain unfazed, still trading in-line with JPY:
Same for 10Y JGB futures - nothing too crazy at all, and less volume trading in the PM session vs the AM session:
So, what the hell was this all about on the bulletproof Japan equity market?
The chatter out there is about “BOJ ___”
As I mentioned, it is not BOJ, it is the China headline related flow, which I will get into next. But before I do - lets say it weren’t China, say we just have no clue what it was - that’s completely fine. But why in the hell would it be a BOJ reaction? No change, in-line with unanimous consensus, released with plenty of time before PM open, and sell off occurs at an arbitrary moment after PM open.
We might not know what it is, but what we can cross off the list is the BOJ policy release as the one thing it’s not. (That’s why the “insert BOJ-tied market explanation” chatter going on is inherently nonsense).
So, as I had commented this morning…
The Long Japan / Short China & HK - Forced Position Unwind
These are by and large NOT human active managers blasting the market indiscriminately, because they are slow readers. Human traders were largely hands off, relative to what we might be assuming - hence the very light trading volumes.
This is systematic and algo flow suddenly getting triggered to short cover (buy to close) China/Hong Kong, and thereby sell to close the Long Japan leg of the trade.
See chart below of NKY futures vs the Hang Seng Index (which was -12% in January) from the moment that Bloomberg drops the whole China stock market support headline:
And that immediate upside on HSI is not human beings who are reading, analyzing, and rushing head-first into opening new long positions on Chinese equities from an unsourced headline that still wouldn’t be materially enough to rescue China’s market if it were real either way. Those are also by and large systematic flows, and they are very very extremely likely short covering- either forced exiting or profit taking, but position closing either way.
HSI rallies, and NKY’s AM upside, which was ignoring the fact that it was BOJ day, stops. Then BOJ releases their zero surprise policy announcement - and you get the knee-jerk upside for 15 seconds.
And then the sudden turn and sell off- and stabilization.
In my view, this downside, at this particular time of day, was related to Long Japan / Short China position exiting, and timed with China / Hong Kong trading hours - selling into Hong Kong AM close (which is 13:00 Japan).
This volume profile and price action is what typical Market-on-Close order execution looks like.
And once Hong Kong / China AM session closed, Japan equities recovered. That’s WHY Japan equities recovered - and sold off in the first place.
Nothing to do with Bank of Japan, as it shouldn’t - again, why would in-line, zero shock BOJ suddenly trigger an arbitrarily timed, sloppily executed rush for the Japan equity market exits? It wouldn’t. But China coming out of nowhere and trying to pump their pathetic equity market that's being shorted against unconditional long Japan buy flows? Yea, that’ll do it.
Now- will Japan equity markets “snap back in line” with reacting to its own domestic central bank’s policy musings from Ueda’s aftermarket press conference upon its first opportunity to react- at 9am market open tomorrow? Sure, maybe, maybe not. We will cross that bridge when we get there.
But again - for now, this is what my live market analysis is. I frankly don’t care what BOJ has released at noon today- I care about green and red blinking tickers first and only. For the record, I closed out half of NKY mini long positions (+9.1%) and have stops in scaled down to +5% up on the balance. I also am long JPY futures call spreads that are flat, in case the 50/50 BOJ policy flipped the other way (Feb expiry- still have time).
Also, I’m taking some cues from BTC price action as it relates to trading NKY directionally - in case anyone hasn’t noticed this correlation, 3 charts below: Intraday, months, years - BTC as the fast money risk appetite litmus test:
And just to repeat - I wouldn't conveying this if it weren’t both relevant and overlooked. But it is both, which is dangerous for those who are unknowingly attributing market price activity to the wrong driver - as they will then continue to follow an irrelevant measure, self-justifying and reaching for explanations all the way.
I live for BOJ days- but when it doesn’t matter, it doesn’t matter. Green and red blinking tickers first.
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tHanks, Weston. You nailed it well. Except for how long it would take BOJ to issue a statement of Doing Nothing/No Change.😎 Turns out it doesn’t take that long.😎.