The Nikkei closed the morning session up 9.4 percent. Expect a retest of the lows because the Bank of Japan has signaled it serious about strengthening the Yen.
The Easy Money Reckoning Arrives
The Wall Street Journal reports The Easy Money Reckoning Arrives
The selloff in global stocks that began Friday and continued on Monday is in part a correction from sky-high values, especially in tech shares. But it may also be the start of a reckoning for a decade and a half of excessive spending and easy money that is going to arrive eventually. How soon and rough the reckoning will be is the great unknown.
The selloff has hit hardest in Japan, with the Nikkei index down 12.4% on Monday, its worst day since Black Monday in October 1987. This extends Friday’s 5.8% drop, and other Asian markets fell too. European and U.S. shares also tumbled, the Nasdaq by 3.4%.
The Japanese plunge is a direct result of a long-needed shift in monetary policy and exchange rates. The Bank of Japan raised its interest-rate target (to 0.25%) last week and laid out a timetable for tapering its quantitative-easing program. BOJ Governor Kazuo Ueda said these moves are intended in part to arrest the falling yen, an unusually explicit statement about exchange rates for a central banker.
These moves have triggered a predictable and necessary repricing of risk in Japan following an extended period of extraordinarily loose money. The yen’s dramatic depreciation throughout this year arose from the yawning gap between relatively high U.S. interest rates and abnormally low Japanese rates. That gap is now narrowing as the BOJ normalizes policy and the Fed prepares for rate cuts.
A weaker yen enticed foreign investors into Japanese stocks that appeared cheaper in the investors’ home currencies. As of March, foreign holders owned about one-third of Japanese equities by value according to economist Jesper Koll. Yen depreciation also boosted the expected yen-denominated profits of Japanese companies.
Mr. Ueda has made clear that these times are over. It’s no coincidence that while Japan’s stock market in recent days has lost all of its gains since January, Japan’s currency has gained back all of its losses from the same span.
US equities
I won’t be here for the open, but as of Midnight Mountain Time, futures suggest the Dow had recovered about 40 percent of its losses and the S&P 500 about half of them.
I highly doubt this selloff is over except perhaps for the short term. Watch out below if volatility subsides without much of a bounce.
This is a very expensive market.
The “Magnificent 7” Stocks
On August 4, I asked Are the “Magnificent 7” Stocks Today’s Version of the “Nifty Fifty”?
Basically yes.
All of the above magnificent seven are excellent companies. But what price are you willing to pay for them?
Good luck with the Magnificent 7 if you are in that trade. You will need it.
Nothing is forever.