Many are still wondering who (or what) stole the jam from the Japanese stock market's doughnut just three short days ago. Some blame an out-of-control bond market; others fear members of the BoJ recognizing they have blown the bubble too big too soon; still more fear the jawboning on JPY devaluation that has seemingly about-faced recently. The reality is - none of these were surprises or new to the marketplace. But in this world of free-flowing totally fungible central bank liquidity, we suspect the following chart is the real answer. Simply put, the S&P 500's bubble just couldn't keep pace with the Nikkei 225's and with USDJPY unable to support the relative price appreciation difference - the six-sigma richness of Japan to the US was just too much. Two-and-a-half months of 'outperformance' undone in 3 days leaves the question - is it over?
While CME positioning shows futures traders the most net short the JPY (against the USD) since 2007 (recently making new lows)...
...it seems traders (perhaps to avoid telegraphing their intentions to the broader market) are furiously hedging their short JPY positions in the 'Mrs.Watanabe-exempt' FX options market. As the following chart of USDJPY risk-reversals (a simple way of visualizing the market's preference for hedging upside vs downside), the options market is decidedly less confident at Abe's ongoing success.
... and if USDJPY drops back to the levels implied by the options market, then the Nikkei has a long way to fall still (and we suspect European sovereigns, US bond-like-stocks, and High yield credit).