Over the past week or two we have seen a rather curious development if you consider that the Strait of Hormuz is still closed. It has been highlighted today by the news from Nihon or Japan.
The benchmark Nikkei 225 index has passed the 63,000 mark for the first time.
Investors returned on Thursday following Japan’s spring break. At one point, the Nikkei 225 was up by more than 3,500 points. It’s the biggest intraday rise on record. And it comes on the back of speculation that the conflict in Iran may soon be over.
AI and semiconductor-related shares added to the surge. (NHK)
So we have seen the biggest intraday move ever for the Nikkei 225 and as Iook back it was only on April 27th that it passed 60,000 for the first time ever. Plus back on April 15th I posted this on social media.
Stock markets has basically shrugged off the conflict in the Middle East. At 58,228 the Japanese Nikkei 225 index is only a thousand points below its all-time high.
Well it has shrugged it off a fair bit more now and the surge was led by this.
Shares in Japanese tech-focused investment giant SoftBank Group soared 16.5% Thursday…….While SoftBank is on course to record its best day since 2020, if gains hold, chip-testing equipment maker Advantest rose nearly 7.8%, while semiconductor equipment supplier Tokyo Electron surged 9.2%. Chip solutions provider Renesas Electronics jumped 13.8%. (CNBC)
Whilst the move was exacerbated by the end of Golden Week ( 3 Bank Holidays in 5 days) moves like this do question the pricing mechanism. Is this the right price or was it the one before? Also whilst the energy situation has improved the price of a barrel of Brent Crude was US $60 when 2026 as opposed to US $100 as I type this. Japan is a big energy importer so its terms of trade have worsened.
If we return to today’s move it would presumably have been even larger if the Bank o Japan had not intervened in the currency markets.
The yen has also risen sharply during the spring break, fueling speculation that Japanese authorities have once again intervened in the foreign exchange markets. The yen was trading around the lower 156 level against the dollar on Thursday morning.
The basic rule of thumb is that a lower Yen benefits the Nikkei 225 via Japanese exporters and vice versa.
The Tokyo Whale
Japan has an elephant in this particular room. It was policy under the a past Prime Minister Abe-san to raise the price of the Nikkei 225 and it was below 8000 then. That developed into something unique in that the Bank of Japan began to buy Japanese equities. In the Covid pandemic this developed further as not only did the size of the purchases increase the Bank of Japan decided to buy on days that the market fell. Over my career there had been a lot of talk about central banks providing a Put Option for equities or that there were various Plunge Protection Teams, but this has been by far the most explicit version. So we are now at unique squared if there is such a thing.
On this road the Bank of Japan become a central bank with a hedge fund overshoot which I call The Tokyo Whale. It’s purchases totaled some 37.1 trillion Yen and as that is on a cost basis it must be near to trebling that at present levels.
They are taking some profits but on a very small scale.
The BOJ plans to sell around 330 billion yen annually of ETFs at book value to avoid impacting stock prices, a pace at which a simple calculation shows it will take 112 years to complete the sell-off. (Asahi.com)
Personally I think this may have nothing to do with the equity position and is to avoid having to declare losses caused by the QE bond holdings.
On a psychological level maybe the foreign exchange intervention has contributed by reminding everyone of the enthusiasm of the Japanese state for intervening in markets. Thus it may be sending a Terminator style message to equity markets of “I’ll be back” should it have the termerity to fall.
The United States
Yesterday this happened according to CNBC.
During the day’s regular session, the broad S&P 500 climbed 1.46%, while the tech-dominated Nasdaq Composite jumped 2.02%. Both indexes reached new intraday and closing highs. The Dow surged 612.34 points, or 1.24%.
We are higher again today although the American markets have yet to fully open.But we have seen a succession of this.
And you and your sweet desireYou took me, oh (higher and higher, baby) (ELO)
Central Banks
This phase has seen a succession of central banks decide to wait and see on the issue of higher inflation. This of course contrasts with their attitude in March 2020 when in many cases they cut interest-rates the next day. So we have a type of Plunge Protection Team theme as market falls on any scale are likely to see interest-rate cuts.
On the other side of the coin we have seen this from the Swedish Riksbank this morning.
The risk that the war in the Middle East will lead to higher inflation has increased somewhat.
So they have made a precautionary increase in interest-rates to get ahead of the curve?
The Executive Board has decided to leave the policy rate unchanged at 1.75 per cent.
They even had the cheek to add this bit.
The current level of the policy rate gives the Riksbank a good initial position to adjust monetary policy if required to safeguard the inflation target.
They will be hoping that people will not read this from the Norges Bank of Norway.
High inflation over time can lead firms and households to plan for persistently high inflation. It may then become more difficult to bring inflation down again.
Norway has joined Australia in being global outliers on the interest-rate front/
QT
This was abandoned by the US Federal Reserve last December. So from then there was an extra US $40 billion per month available to go somewhere….
AI
This feels like a relentless train at the moment.
Chinese AI startup DeepSeek could be valued at as much as $50 billion in its maiden fundraising drive, three sources said, as the large language model builder seeks to reverse its years-long strategy of rejecting outside funding. ( Reuters)
The numbers keep getting larger as everyone ignores the reality that a large change like this always brings failures as well as successes. The data centre component seems to be ignoring the reality that it requires more electricity than anyone can reliably provide.
Those of a nervous disposition might like to look away now as a man prized by many as a reverse-indicator gets on the train.
CNBC’s Jim Cramer said the data center and artificial intelligence boom is spreading to every corner of the market.
Comment
This phase reminds me of what a past colleague used to say, which is that equity markets climb a wall of worry. If so maybe there is more to come! Regards Paulo by the way if you are out there.
But on the other side of the coin we have seen much higher bond yields which not only raise costs for businesses but also as a comparison or competitor set a higher bar. Yet nobody seems to care…