Seemingly everyone has assumed that the BOJ would step back in and ramp up their QQE and asset purchases. The consensus was for a doubling of ETF purchases. Yet, as we’ve discussed many times [see: Sayonara Abenomics], the BOJ is between an inflationary rock and and debt hard place. Last night’s decision to hold the course — music to bears’ ears — has disappointed a great many investors who were counting on the music never stopping.
Our major thesis since late December [see: Update on NKD & JPY] has been that a stronger yen would do some real damage to equities. Now that it’s happening, the question becomes “how far?”
I have been unable to quantify the size of the yen carry trade, but my sense is it’s much greater in size than existed in the previous unwindings of 1998, 2002 and 2007. Margin debt is as great as it’s ever been; and, stocks are priced at the same high multiples.
One thing for sure: the bulls won’t just roll over. If this sell-off gets serious enough, we can expect a lot of jaw-boning from the usual suspects. And, if that doesn’t work, the Fed can always taper the taper (to, you know, “reduce unemployment.”)
But, we’ll likely see more downside first. Keep an eye on the targets we discussed yesterday. The first — the SMA50 at SPX 1840/ES 1831 — should arrive shortly after this morning’s open. continued for members…
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