The Japanese Nikkei 225 has corrected a staggering 15% since just May 22.
As a result, one of the world’s hottest stock markets is suddenly flirting with “bear market” territory – defined as a 20% price decline from the market’s previous peak.
In his latest note to clients, Deutsche Bank strategist Makoto Yamashita cautions that “we do not see a bottom,” and says it is “natural to assume that the Nikkei Average will correct for several months.”
The good news, says Yamashita, is that a range-bound Nikkei will help to reduce the volatility in the Japanese government bond market that has been cause for concern in the marketplace as of late.
It is therefore natural to assume that the Nikkei Average will correct for several months even if it eventually rises above 16,000. Stocks could rebound faster this time given volatility is higher, but at least in June we see little chance of another rise in share prices. A range-bound Nikkei Average would help to reduce volatility in JGBs. Gross potential buying pressure will become relatively large compared to coupon-bearing JGB issuance with supply/demand in June impacted by the BoJ’s more flexible JGB purchases and large JGB redemptions. Conditions for a fall JGB yield volatility are coming together. UST yields remain a source of volatility, but we believe the risk of a sharp rise in yields has diminished given the deterioration in yesterday’s US ISM index.
The Nikkei finally stanched the bleeding today – rising 2.1% – but if Yamashita is correct, the wild price gains that have made Japanese stocks one of the hottest trades of 2013 may pause for a while going forward.
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