Nikkei Bearish Bets Rise to Year High Amid Global Rout
Puts protecting against a 10 percent drop for the Nikkei 225 cost 6.5 points more than calls betting on gains, according to data on one-month options compiled by Bloomberg. The price relationship known as skew rose to 11.2 on Jan. 31, the highest since Jan. 18, 2013.
The Nikkei 225 has fallen more this year than any other developed-nation index, slumping 11 percent from a six-year high reached Dec. 30, as losses in emerging-market currencies stoked concern that the global economic recovery will falter. Investors remain cautious before today’s U.S. government-jobs data, said Allianz Global Investors Japan Co.
“The options market shows the fear that’s spreading among market participants, with demand for puts being strong because you don’t see solid, positive catalysts in the near term,” Kazuyuki Terao, Tokyo-based chief investment officer at Allianz Japan, said by phone yesterday. His firm oversees about 50 billion yen ($491 million) in assets. “The market is skittish and vulnerable to bad news.”
Japanese shares have led a global retreat that has erased about $2.3 trillion from equity values worldwide this year amid emerging-market volatility, signs of slower growth in China and stimulus cuts by the Federal Reserve. The yen capped the biggest monthly rally since April 2012 against the dollar last month.
The U.S. Labor Department may report today that businesses added 180,000 employees in January after a 74,000 increase in December, according to the median forecast of economists surveyed by Bloomberg. A private report on Feb. 5 showed companies added fewer workers than projected last month as colder-than-normal weather limited progress in the job market.
The Nikkei Stock Average Volatility Index fell 2.5 percent to 29.98 today after jumping to a seven-month high on Feb. 4. The VStoxx Index, which tracks Euro Stoxx 50 Index options prices, lost 8.2 percent to 20.80 yesterday. In the U.S., the Chicago Board Options Exchange Volatility Index, or the VIX (VIX), reached its highest level since December 2012 on Feb. 3.
The Nikkei 225 capped the biggest annual rally in four decades in 2013 as the central bank’s monetary easing helped weaken the yen, boosting the earnings outlook for exporters.
Investors are weighing whether Prime Minister Shinzo Abe can ignite the equity market with his so-called third arrow of growth initiatives aimed at making Japan’s economic recovery sustainable.
Abe is calling on firms to boost salaries to sustain a reflationary effort so far driven by stimulus and the yen’s 18 percent drop against the dollar last year. Wage increases aren’t keeping up with rising prices, posing a risk to consumer spending as the nation girds for a higher consumption tax set for April.
The selloff in Japanese stocks will come to an end soon because the nation’s growth recovery remains solid and company profits are improving, according to Nissay Asset Management Corp., which oversees about 6 trillion yen.
“When you look at the domestic picture, you can tell Japanese shares won’t fall much from here,” Isao Kubo, a Tokyo-based equity strategist at Nissay Asset, said by phone on Feb. 5. “Investors are done with selling. The market won’t fall because of domestic factors, and earnings are going well, especially for exporters.”
Of the 222 companies on the Topix index that have reported quarterly earnings since the beginning of January and for which profit estimates are available, 64 percent beat analyst projections, according to data compiled by Bloomberg.
Implied volatility, the key gauge of options prices, for one-month options with an exercise level 10 percent below the Nikkei 225 rose to 36.1 on Feb. 4, the highest level since July 29. The measure closed at 33.7 yesterday. The gauge for calls 10 percent above the index ended at 27.2 after reaching 27.6 on Feb. 4.
The volume of Nikkei 225 puts (NKY) climbed to 98,863 on Feb. 4, the most since June, according to data compiled by Bloomberg. There were 1.67 million options giving the right to sell the gauge, compared with 1.89 million calls, data compiled by Bloomberg show.
Investors will probably keep hedging against losses in Japanese stocks before a series of events including the U.S. jobs data and Janet Yellen’s first appearance before Congress as Fed chairman next week, according to Goldman Sachs Group Inc.
Foreign investors sold a net 740 billion yen of Japanese shares in the week ended Jan. 31, the most since June 2010, data from the Tokyo Stock Exchange show. They boosted holdings by a record last year.
“As long as concerns over emerging nations linger, it’s hard for investors to take positions, and so this is not the time they will unwind puts,” Naohide Une, Tokyo-based head of equity derivatives trading at Goldman Sachs, said by phone on Feb. 5. “As we await important data and events overseas, it seems investors are scrambling to reduce risk after many of them overweighted Japan. That’s pushing up demand for puts.”
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