Something snapped in Japan today.
With Asian stocks finally breaking out a decade-long doldrum, and hitting record highs earlier in the session, and with Japanese equities starting off the session on the right foot and continuing their recent ascent which until Wednesday had seen them rise on 23 of the past 25 days, Japanese shares suddenly lurched on Thursday, plunging sharply lower after dramatic intraday swings took the Nikkei and Topix indexes to multi-decade highs only to drop in the afternoon on futures-driven trading ahead of the following day’s options settlement. All told, in a little over an hour, what had been another solid rally in Japanese stocks turned into some rather sharp clear-air turbulence, with the Nikkei 225 Stock Average plunging about 3.6% from the afternoon-session high to its low for the day.
It all started off well enough: in the morning session, the Topix notched a new 26-year high and the Nikkei 225 broke the 23,000 level for the first time since January 1992, as financial and securities shares rallied.
Then something flipped and in a gut-churning rollercoaster of a move, the Nikkei lurched from an over 2% gain which took it to a fresh 25 year high at the end of the morning session, to a loss of as much as 1.7%. The sudden reversal quickly spread to the currency market, with the yen surging before spreading across Asia: South Korean and Hong Kong equities also tumbled in sympathy. As Bloomberg snarks, "Sydney traders could count themselves lucky their market had already closed before the worst of the sell-off."
Some traders laid the blame on technical factors - after all, the Nikkei has been on a tear, ending the day lower in just five times since the start of October (assuming Wednesday’s 0.04% "drop" was as unchanged). Others, like Bloomberg, wondered if the Nikkei had suffered a flashback: in an odd coincidence the Nikkei 225's was its biggest reversal (points-wise) since exactly a year ago, when Donald Trump’s shock U.S. election victory rocked markets around the world... before they bounced back the next day.
Perhaps it was indeed Trump's fault once again: the drop started with President Trump’s first visit to the region, and the slump in the Nikkei (which then weighed on South Korean and Hong Kong stocks) accelerated as Trump spoke to reporters in Beijing. Standing alongside China’s President Xi Jinping, Trump said that the world has the power to take on the North Korean “menace.”
Whether this rhetoric contributed to the market ruckus is unclear. What is clear is that the veil of comlacency was violently pierced - the Nikkei Volatility Index surged 23%, the most since August - if only for a while.
Still, when the dust settled, the Nikkei ended down just 0.2% at 22,868.71, after tumbling 850 intraday points from a morning high of 23,382.15, or up 3%, to an afternoon session low of 22,522.83, or down -1.7%, its biggest one-day move since the election of U.S. President Donald Trump one year ago. Meanwhile, the Topix ended down 0.3 percent at 1,813.11, after soaring as high as 1,844.05 in the morning and skidding as low as 1,791.12 in the afternoon.
The modest closing drop however masked a violent undercurrent, with volatility soaring 23% while volume on the Tokyo Stock Exchange’s first section came to 4.9935 trillion yen, its highest since Nov. 4, 2014. TSE first section volume came to 2.748 billion shares, its highest since Dec. 12.
Attempts to explain the mini flash crash proliferated: “There was no special news that triggered this afternoon’s volatile moves,” said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “It was massive position adjustment ahead of tomorrow’s SQ.” The closely watched options settlement price, known in Japan as the special quotation, or “SQ,” is calculated from the opening prices of the 225 shares in the Nikkei average on the second Friday of every month.
Other traders said algorithm-driven trading exacerbated the moves once they began. Financial and securities shares were among strong performers in the morning, though they pared their gains in afternoon trade.
Courtesy of Bloomberg, here is the full list of possible explanation for today's sharp tumble:
Takashi Kudo (Head of corporate sales at Moneysquare Japan Inc. in Tokyo):
- There was some speculation in the market that the drop in equities was due to profit-taking by foreign investors, before the special quotation, and that dragged the dollar/yen lower
- Typically, declines in stocks lead to yen buying.
Mitsuo Shimizu (Deputy general manager at Japan Asia Securities in Tokyo):
- “The biggest factor behind today’s roller-coaster move was position adjustments ahead of the special quotation”
- “At the end of the day, people came to realize ‘well, corporate fundamentals are still good.’ And then people bought on dips toward the market close”
Hans Goetti (Founder of HG Research in Singapore):
- The afternoon drop in Japanese stocks may just be a one-day move and is nothing to worry about
- Japan stocks could rise as much as 30 percent in next few months on earnings, valuations and central bank policy
Jingyi Pan (Strategist at IG Asia in Singapore):
- “I do think the market is taking profit indeed, but likely due to the fact that it had been an opportune moment”
- Some of the rhetoric coming out of U.S. President Donald Trump’s China visit had not been the most amicable, and across haven assets, there had been some buying. The reiteration of the need to “address the unfair trade practices” had likely been one alarming the markets
Tsutomu Yamada (Analyst at Kabu.com Securities Co. in Tokyo):
- Sudden drop in the Topix and the Nikkei 225 is simply a technical adjustment as the earlier rally was too fast. Some people are taking profits after extreme market advance
Yukio Ishizuki (Senior currency strategist at Daiwa Securities Co. in Tokyo):
- A pullback triggered gains in the yen against the dollar and other currencies, while the move wasn’t triggered by any news or currency-specific issues
So was the mini crash just a one-off event, or a harbinger of the bitcoin-esque mega plunge yet to come? And was the miraculous last minute recovery another BOJ intervention? Those are all questions the bulls - not only in Japan - will be asking themselves today.