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?
[9]
While CME positioning shows futures traders the most net short the JPY (against the USD) since 2007 (recently making new lows)...
[10]
...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.
[11]
... 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).
Charts: Bloomberg