"when investors "infer the persistence of low volatility from empirical evidence" (in other words when knowledge is imperfect and there is a probabilistic scenario under which the moderation can be permanent, then "Bayesian learning can deliver a strong rise in asset prices by up to 80%. Moreover, the end of the low volatility period leads to a strong and sudden crash in prices."
More importantly we watched with interest the move on the Japanese VIX equivalent on Thursday at the same time of the sell-off, in true "sucker punch" fashion - source Bloomberg:
And does this move compare to 2008? It is indeed a fairly large movement in volatility as indicated in the below graph from Bloomberg displaying the VNKY index from May 2007 to today:
We could not agree more with the above great comments. Yet, foreign investors continue to buy Japanese stocks to the tune of JPY 716 billion versus JPY 879 billion as reported by JP Morgan, from Japan's MoF released weekly update of portfolio flows:
"Foreign investors have bought a total of JPY4.6trn in Japanese stocks in April and May so far." - source JP Morgan.
But more interestingly was the following:
Japanese net sold JPY804bn in foreign bonds last week (May 13-17), more than undoing the net buying in the three weeks prior (which totaled JPY692bn). Japanese sold JPY137bn of foreign stocks last week as well, which is also more than the net buying amount in the previous two weeks (which sums up to JPY47bn)." - source JP Morgan
In conjunction to the heightened volatility in the Japanese JBG market, we have been looking with interest at the roller coaster moves in the 30 year Japanese bond space versus the Swiss equivalent - source Bloomberg:
So while equities our enjoying the Japanese show, even after the following recent stall of the Japanese "Starfighter", we have been busy watching with interest the credit space given we still believe Japanese financials CDS to be "cheap" as displayed in the below graph from CMA, part of S&P Capital IQ:
Flying a "Central Bank" or a NF-104 Starfighter requires strict and delicate airplane/monetary control...
We would therefore like to re-iterate what we said in Last week's conversation "It's a Wonderful Life":
"Given that for these Japanese banks profits are tied up to substantial trading and "unrealised" investment bond gains from abroad and looking at the recent rise of JGB yields since the arrival of Mr Kuroda at the Bank of Japan, and knowing the very large size of JGB portfolios for these Japanese banks, in the absence of investment bond gains (which would mean selling some European government bond holdings...yikes!), unrealised losses on their JGB portfolios will not doubt put pressure, not only on their shareholder's equity and regulatory capital, but on their CDS spreads as well and their earnings. The CDS for these Japanese banks is trading closer to the more highly rated Australian banks but also Korean counterparts such as Kookmin according to CreditSights. Therefore, should "Abenomics" disappoint, there is indeed some room for these Japanese banks CDS to widen "significantly" at some point...(sorry we are not paper fortune tellers)." - source Macronomics
Nikkei Index - 3 Month 100% Moneyness Implied Vol versus Japan 5 year CDS since January 2010 until today - source Bloomberg:
"If at first you don't succeed, try, try again. Then quit. There's no point in being a damn fool about it." - W. C. Fields