The "Real Risk" for Nasdaq is Approaching

The delicate balance of global financial markets is often influenced by the monetary policies implemented by major central banks, a fact that many investors keep a keen eye onRecently, Japan's inflation expectations have begun to edge closer to the central bank's long-standing target of 2%. This potential shift could open the door to a normalization of Japan's monetary policy, which has profound implications not just for its economy but also for international stock markets, particularly those in the United States, exemplified by the Nasdaq index.

As noted by financial analysts, this scenario poses significant risks to global financial markets, particularly for equitiesIt is worth mentioning that Japan has, in many ways, served as a significant source of liquidity for the world's financial marketsThis has, in turn, supported rising valuations in stock markets, with implications being felt particularly in tech-heavy indexes like the Nasdaq.

Dhaval Joshi, Chief Strategist at BCA Research, emphasized that the relationship between the Nasdaq and U.S

• Solidifying the Foundation for Data Value Release
• The Biggest Benefactor of AI!
• Patient Capital in Fund Investing
• US Jobs Surge Drives Dollar to 110
• AI Fuels French E-commerce Growth

real bond yields has been closely aligned from 2019 through 2022. However, an intriguing shift occurred at the end of 2022; the Nasdaq's valuations began aligning more closely with the last remaining negative real bond yield in the world — JapanThis cross-pollination of valuation trends highlights how Japanese monetary policy could become a key contributor to the health of U.Stechnology stocks.

Interestingly, a near-synchrony has been observed between the Nasdaq index's returns and Japanese real bond yields from 2023 to 2024. This means that the valuation risks facing American tech companies are likely not primarily driven by rising U.Syields but rather the repercussions of an environment where Japan’s yields begin to riseThus far, the lack of substantial increases in Japanese real yields explains why valuations have not yet been severely impactedYet, over a projected timeline of one to two years, it is reasonable to anticipate a rise in these yields, potentially severing the liquidity lifeline that has bolstered stock market valuations in the near term.

This prospective shift in monetary policy could pose significant risks for stocks relative to bonds, especially for the high-flying technology stocks that have defined the market over the last few years

Joshi's analysis indicates that maintaining vigilance on key financial indicators, such as the exchange rate between the U.Sdollar and the Japanese yen, and the ratio of the Nasdaq to the 30-year U.STreasury bond, is crucialA collapse in these relationships could herald a market reversal, a sentiment echoed by other analysts observing Japan's monetary policy landscape.

Notably, Xu Xiaoqing from Dunhua Assets recently cautioned that the concurrent rise of gold and U.Sequities is emblematic of excessive global liquidity, exacerbated by the Bank of Japan's reluctance to tighten its monetary stanceIt's a phenomenon likened to a "gray rhino" — a well-known but often underestimated threatJapan remains the only major developed economy that has not initiated any form of balance sheet reduction, a stark contrast to its peers, and is not expected to make significant moves toward this until 2025.

Xu pointed out that the BoJ is repeating the Federal Reserve's 2021 miscalculation in underestimating inflation's resilience

The Japanese central bank has maintained a perception that the recent spikes in inflation are merely transitoryThis complacency poses risks; by the time the BoJ needs to implement rapid interest rate hikes to counter inflationary pressures, it could risk not only local economic stability but could also exacerbate shocks across international markets.

This ripple effect in global liquidity driven by Japan's interest rate differentials is significantHistorically, it has been observed that when the interest rate spread between the U.Sand Japan exceeds 400 basis points, U.Sequities see substantial gains coupled with reduced volatilityConversely, when the spread narrows below this threshold, U.Sstock market performance tends to stagnate, accompanied by increased market volatilityCurrently, the narrowing spread hovering around 400 basis points raises concerns, with risk managers predicting that a potential reversal of this trend could lead to a substantial market downturn, reminiscent of events anticipated in 2025.

As financial landscapes continue to evolve, the implications surrounding Japan's monetary policy normalizing present both risks and opportunities for investors globally

Your email address will not be published.Required fields are marked *