Rise and shine everyone.

Please don’t panic. Markets are down. The Nikkei entered bear market territory this morning closing -12%, and overall -20% from its peak. We’ve been warning about getting out of Japanese equities, and this was exactly why. Although I must admit, I envisioned a more orderly selloff. This is quite brutal.

The BoJ’s tapering and hike, has set off a series of trades in Japan. The Yen has strengthened and that’s putting pressure on the Nikkei, which is dominated by exporters. As the idea that BoJ is willing to hike further set it, the bond market started pricing in the idea that a restrictive BoJ would put pressure on growth. That was Issue #1.

Issue # 2 is the sell off in the US and the markets pricing in lower growth. It is the US selling pressure driving further selling pressure in Japanese equities, not the other way around. This is why we’re seeing US yields under pressure. The US is pricing in a growth scare, and everyone with exposure to the US market is easing up on positions.

The slowdown in growth is key here.

It started with the announcement surrounding the chips. That rolled into earnings, and finally weaker macro data - all in the US.

And all of this is intertwined with election uncertainty and lower summer liquidity.

Mayhem had a great update on Navigating the Markets yesterday evening. And John Authers wrote a good piece on Bloomberg about this.

Traders are now pricing in a 25bp cut within a week, i.e., an emergency meeting by the Fed. It’s unlikely that the Fed panic cuts here because that could send the market into a further tailspin. I could be wrong but, we’re not at panic levels.

What I will say though, is there’s still time to hedge… and there’s still time to move into defensive.

Chart of the Day

The Vix spiked this morning.

And the yield curve is very close to coming out of inversion.

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)