Reaction To Japan Rate Hike

Please click here for an enlarged chart comparing SPDR S&P 500 ETF Trust (NYSE:SPY) which represents the benchmark stock market index S&P 500 (SPX) and iShares MSCI Japan ETF (NYSE:EWJ).

Note the following:

  • The chart shows Japan ETF EWJ has outperformed S&P 500 by 81%.  Excluding the impact of the currencies, Nikkei 225 has outperformed the S&P by about 152% year-to-date.
  • Overnight, Bank of Japan (BOJ) increased its key interest rate to 1.25%.  This is the highest rate in three decades.
  • Expectations were that if BOJ were to raise its key rate, the yen would strengthen.  However, the yen has fallen on the news.  In our analysis, the reason for the perverse reaction is that the vote in favor of a rate hike was 7 to 2.   This indicates division at BOJ.  Such division may make further rate hikes difficult.  In our analysis, the risk in Japan is inflation going above 2%.  In such an environment, further rate hikes will be needed.  
  • The move in the yen is creating a policy headache for the U.S.
    • Japan is a large holder of U.S. Treasuries.  To protect the yen, Japan may need to sell U.S. Treasuries so that it has dollars to intervene in the forex market.  Such a selling will increase yields in the U.S.  Yields are already rising in the U.S. creating headaches and leading the Fed to raise interest rates for the first time since July 2023.
    • There is risk to the U.S. stock market from the carry trade, in addition to the risk from rising yields emanating from Japan.  In the carry trade, funds have borrowed hundreds of billions of dollars in Japan to invest in the U.S., primarily in the AI trade.
  • As a full disclosure Japan ETF EWJ is in our portfolio. 
  • Today is triple witching.  In triple witching, stock index futures, options on indexes, and options on stocks expire on the same day.  Yesterday, the stock market, especially semiconductor stocks, staged a major rally driven by triple witching.  In the early trade today, there is upward pressure from triple witching.
  • In important news, hackers used Anthropic’s Claude to break into OpenAI systems.  Although the stock market has dismissed AI safety issues, AI safety issues continue to be a risk.

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks.  For this reason, it is important to pay attention to early money flows in the Mag 7 stocks on a daily basis. 

In the early trade, money flows are positive in Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc Class C (NASDAQ:GOOG), Meta Platforms Inc (NASDAQ:META), and Tesla Inc (NASDAQ:TSLA).

In the early trade, money flows are neutral in Apple Inc (NASDAQ:AAPL), Microsoft Corp (NASDAQ:MSFT), and NVIDIA Corp (NASDAQ:NVDA).

In the early trade, money flows are neutral in S&P 500 ETF (SPY) and positive in Invesco QQQ Trust Series 1 (NASDAQ:QQQ).

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust (GLD).  The most popular ETF for silver is iShares Silver Trust (SLV).  The most popular ETF for oil is United States Oil ETF (USO).

Bitcoin

Bitcoin (CRYPTO: BTC) is seeing buying.

What To Do Now

Consider continuing to hold good, very long term, existing positions and add tactical positions based on signals.

The Arora Report is known for its accurate calls. The Arora Report correctly called the big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, the DJIA rally to 30,000 when it was trading at 16,000, the start of a mega bull market in 2009, and the financial crash of 2008. Please click here to sign up for a free forever Generate Wealth Newsletter.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.