REITERATING OUR RESEARCH VIEW ON JAPAN… AGAIN

Takeaway: We remain comfortably neutral on the “Abenomics Trade” here as domestic factors conflict with globally interconnected risks.

Gee, what a boring year it has been for the bulk of investors with capital allocated to Japan. The Nikkei 225 is trading at roughly the same level it did back in the last week of JAN – as is the USD/JPY cross. Truly, Japanese financial markets have been as boring in the YTD as BoJ monetary policy statements have been since Governor Haruhiko Kuroda got his term started with a bang in APR of last year.

 

Judging by speculative net length in the futures and options markets, it remains our view that many international investors dog-piled into the “Abenomics Trade” (i.e. long Japanese equities/short the JPY) at the end of last year – likely in an attempt to chase what had been one of our 2013 “moneymaker” trades alongside our #RatesRising and #GrowthAccelerating (i.e. the outperformance of the domestic growth style factors) themes.

 

#goodfortune

 

What hasn’t been so fortunate for investors is the -6.6% YTD decline in the Nikkei 225 or the +2.8% appreciation of the Japanese yen versus the US dollar. Moreover, the outlook from here remains undecided as ever as domestic factors conflict with globally interconnected risks.

 

This high-conviction directionless view is something we have been wrestling with since the end of JUN, when we detailed the economic puts and takes contributing to what we continue to see as a fiscal and, more importantly, monetary policy vacuum in Japan:

 

  • JAPAN POLICY VACUUM PART II? (6/30): We lack conviction on the intermediate-term direction of the Abenomics Trade and we think investors should remain on the sidelines for now.
  • REITERATING OUR RESEARCH VIEW ON JAPAN (7/15): We reiterate our call of not having a high-conviction call on Japan here amid a convoluted globally-interconnected monetary policy outlook.

 

In full disclosure, this view comes after recommending investors short and subsequently cover Japanese equities back in mid-FEB and late-MAY.

 

 

It’s worth noting that from MAY 28 through JUN 30 the Nikkei 225 appreciated +3.3% in the face of a +0.5% advance in the JPY/USD cross. Since then, however, the Nikkei 225 has traded flat (i.e. +0.3%) in the face of a -1.1% decline in the JPY/USD cross. That’s a good cover followed by an even better call to move to the sidelines amid a breakdown in the well-known inverse correlation supporting the Abenomics Trade.

 

If you ask us, we think that inverse correlation is breaking down due to one primary factor: market participants trying to decipher whether or not the recent strength in the US Dollar Index is a harbinger of good news (i.e. a Quad #1 or Quad #2 setup in the US) or a bad news (i.e. a Quad #3 setup in the Eurozone that facilitates a Quad #4 setup in the US as our domestic #Q3Slowing theme remains in play).

 

For those of you who would like more details regarding the aforementioned scenario analysis, please refer to the following presentations: REPLAY: 3Q14 MACRO INVESTMENT THEMES CALL (7/9) and VIDEO & SLIDE DECK: ARE YOU PREPARED FOR QUAD #4? (8/5).

 

Looking to factors specific to Japan, the 2Q GDP report was yet another nonevent in the context of forcing the BoJ’s hand. The release was in line with consensus expectations and those of the Japanese government, as confirmed by Economy Minister Akira Amari following the release, which had a muted impact on the otherwise-volatile Japanese equity market (it closed up +0.4% on the day).

 

  • 2Q Real GDP: -6.8% QoQ SAAR from 6.1% prior
  • YoY: -0.1% from 3% prior
    • C: -2.7% YoY from 3.5% prior
    • I-Residential: -1.9% YoY from 12.1% prior
    • I-Commercial: 7.1% YoY from 11.6% prior
    • G: 0.6% YoY from 0.7% prior
    • X-M: 2.3% YoY from -38.6% prior
  • 2Q GDP Deflator: 2% YoY from -0.1% prior

 

Importantly, LDP officials expect GDP to rebound in the third quarter (as do we), so there would appear to limited need for either fiscal or monetary policymakers to step in here to aid Japan’s recovery from the tax hike-induced weakness. It’s worth noting that the 3M trend in the preponderance of Japanese growth data is decidedly positive.

 

REITERATING OUR RESEARCH VIEW ON JAPAN… AGAIN - Japan High Frequency GIP Data Monitor

 

This is especially true for the BoJ; recall that while acting president of the Asian Development Bank, Kuroda was very critical of the piecemeal easing measures oft-implemented by his predecessor Masaaki Shirakawa. Rather, the current BoJ chief prefers the “big bang” stimulus – something that may not be necessary until reported inflation slows throughout 2H14, which is something our models are forecasting. That puts the timeline for an expansion of the BoJ’s QQE program in the 1H15 range.

 

REITERATING OUR RESEARCH VIEW ON JAPAN… AGAIN - JAPAN

 

All told, be it Yellen & Co. potentially preparing to devalue the USD (and thereby inflating the JPY) or #GrowthSlowing in the US and EU that perpetuates a meaningful reversal of #VolatilityAsymmetry, we think it’s best for investors to remain on the sidelines (i.e. not involved or a combination of low gross and tight net exposures) with respect to the Abenomics Trade.  

 

Lastly, if you aren’t yet familiar with the debate surrounding the outlook for US monetary policy we’ve been trying to prepare investors for since JAN, we highly encourage you to review the following Reuters article: "Yellen Resolved to Avoid Raising Rates Too Soon; Fearing Downturn" (7/12).

 

Have a wonderful evening,

 

DD

 

Darius Dale

Associate: Macro Team


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more