The BoJ bought ETFs for the first time in two months on Monday, as Japanese equities slumped as much as 4% in what amounted to a catch up trade with Wall Street, where stocks dove Friday on concerns around a hawkish Fed.
The bank stepped in with 70.1 billion yen in purchases after the Topix fell 2.5% over the morning. The last time the BoJ bought ETFs was on April 21.
Ultimately, the Nikkei and the Topix fell 3.3% and 2.4%, respectively, to start the week. It was another manifestation of the “reflation-off” trade that hit cyclicals last week in the wake of the Fed’s pivot at the June meeting. The Nikkei hit a three-decade high in February after surging more than 80% from the pandemic lows (figure below). It’s been a sideways slog since, as investors fret over the fate of the Olympics and concerns over a lackluster vaccination push.
As a reminder, the BoJ scrapped an annual purchase target for ETFs following a policy review earlier this year, but it reserved the right to intervene in order to — and I don’t know any other way to put this — keep stocks from falling “too” much on bad days. The BoJ is a dip-buyer armed with a printing press.
As of end-March, the BoJ held 51.5 trillion yen in ETFs, with a paper gain of more than 15 trillion yen (figure below). May was the first month the BoJ bought no ETFs since 2013. The “streak” is over (and yes, that’s supposed to be funny.)
As of last year, the BoJ was the largest owner of Japanese stocks, surpassing GPIF.
Meanwhile, the duration rally looked set to accelerate — before eventually abating entirely during the US session. At one point, 30-year Treasury yields fell below 2% for the first time since February. They’d later cheapen materially, all the way back to 2.10%. Monday’s reversal notwithstanding, global curves flattened in tandem with the US in the post-Fed shakeout. As Bloomberg noted, “investors [are] speculat[ing] that other central banks can afford to turn more hawkish without fueling excessive gains in their currencies.”
The BOE meets this week. It’ll be Andy Haldane’s swan (or hawk) song.
In a Monday note, Rabobank’s Michael Every wrote a bit about the reaction (to the Fed) in the US bond market. “The overall impression is of the market screaming ‘POLICY ERROR!’,” he said.
“It will likely take equities tumbling to get the Fed’s full attention, but even so, last week’s volatility could potentially be a sign that US policy tightening is over even before it began,” Every added. “Unless we get a shift of fiscal policy and supply chains.”