Richard Koo: " Honeymoon For Abenomics Is Over"

As we noted just two weeks ago - before the hope-and-change-driven exuberance in Japanese equities came crashing down - those who believe in Abenomics are suffering from amnesia and Nomura's Richard Koo clarifies just who is responsible for the exuberance and why things are about to shift dramatically. Reasons cited for the equity selloff include Fed Chairman Ben Bernanke’s remarks about ending QE and a weaker than expected (preliminary) Chinese PMI reading, but, simply put, Koo notes, more fundamental factor was also involved: stocks had risen far above the level justified by improvements in the real economy. It was overseas investors (particularly US hedge funds) that responded to Abe's comments late last year by closing out their positions in the euro (having been unable to profit from the Euro's collapse) and redeploying those funds in Japan, where they drove the yen lower and pushed stocks higher. Koo suspects that only a handful of the overseas investors who led this shift from the euro into the yen understood there was no reason why quantitative easing should work when private demand for funds was negligible... The recent upheaval in the JGB market signals an end to the virtuous cycle that pushed stock prices steadily higher.

Where Are We Now?

The Week That Was: June 3rd - 7th 2013

1. U.S. trade deficit comes in slightly better than expected, still hits $40.3bn
2. May non-mfg ISM comes in at expectations (as orders slow and inventory builds)
3. June’s Beige Book is out, and it didn’t say growth is outright slowing, so that’s good
4. Initial weekly jobless claims 346k, almost exactly in-line with expectations
5. Thursday’s 3:30 ramp was epic, RC LLC has your back – just BTFD
6. Non-Farm Payrolls beat expectations

1. The problem with Japan’s " Plan B"
2. IG credit spreads widening
3. Abe’s attempts at defeating the  " inflation monster" underwhelm
4. Hindenburg Omen beginning to confirm
5. The Tuesday steak is over
6. Is there a collateral shortage starting? Overnight repo suggests the possibility
7. Gasp! Dow drops below 15,000
8. Big miss in May for ADP, 135k vs 165k consensus
9. As a reminder, equities are completely diverged  from credit & macro indicators
10. Nikkei enters bear market, sees 20% corections from its highs
11. The USD/JPY has crashed
12. The Real unemployment rate  is 11.3%