‘Please Stop!’ Says Daiwa Trader, as Topix Sinks Most Since 2011

Updated on
  • Japanese shares plunge on surprise Brexit vote as yen surges
  • Selloff triggers circuit breakers in Osaka futures market

On Daiwa Securities Group Inc.’s Tokyo trading floor, traders spent most of the day on edge, with the atmosphere getting tenser with every tick in the market. 

After forgoing their usual lunch break, minutes of frantically typing sell orders turned to hours as Japanese shares plummeted further. Local television crews were filming their reactions.

“It’s fallen 8 percent!” shouted one trader when the Nikkei 225 Stock Average broke below 15,000. Then came another, pleading with the market. “Please stop!” he said.

By the end of the day, Japanese shares had tumbled the most since the aftermath of the March 2011 earthquake, as Britons confounded markets and bookies by voting to leave the European Union.

The Topix index plunged 7.3 percent to 1,204.48 at the close, its biggest decline since March 15, 2011. Circuit breakers were triggered on futures for the Nikkei 225 Stock Average, Topix Core 30 Index and JPX-Nikkei Index 400 measures in Osaka after contracts fell 8 percent. As the yen surged, Japanese shares posted the biggest decline in Asian markets.

The Japanese benchmark gauge started the day higher as polls indicated the “Remain” camp led and investors said they expected that outcome. The mood quickly changed as more results trickled in showing the “Leave” side doing better than expected. Then, as a slew of vote-counts poured in during the Tokyo lunch break, the yen soared from about 103 to 99 per dollar in less than a minute as realization set in that Brexit was looming. Futures plunged, as did cash equities when the market reopened.

“Things have gone wild,” said Hiroaki Hiwada, a Tokyo-based strategist at Toyo Securities Co. “I’ve never seen a market like this before.”

For more on the historic decision by the U.K. public to leave the EU, click here

Volume surged Friday as traders reacted to the surprising news, with the number of shares changing hands on the benchmark gauge rising to almost twice the 30-day average. The share plunge means Japanese stocks are now the world’s worst-performing developed equity market in 2016, with the Topix down 22 percent.

“The sharp fall in Japanese shares appears an overreaction as the indices have little direct exposure to the U.K.” said Sean Darby, chief global equity strategist at Jefferies Group LLC in Hong Kong. “What’s happened is that Japan’s deep, liquid markets in this time zone get walloped anytime we have risk aversion.”

Leveraged Giant

Japan’s giant Next Funds Nikkei 225 Leveraged Index ETF, which produces moves that are double the size of the underlying gauge, plunged 16 percent, the most since its inception in April 2012. The $6.4 billion exchange-traded-fund is the biggest of its kind globally, and has been accused of amplifying moves in Nikkei 225 futures when it buys and sells the contracts near the end of the trading day.

Japan can take appropriate action in foreign-exchange markets if needed, Finance Minister Taro Aso told reporters Friday afternoon. He noted that Group-of-Seven leaders have currency-swap agreements that can be used if needed, while declining to comment on whether there has been intervention. The markets are nervous, he said, and he’s watching the situation closely. The yen and Topix had little reaction to his comments.

Carmakers and electrical-appliance manufacturers bore the brunt of the rout in Tokyo as every stock on the Nikkei 225 retreated. Toyota Motor Corp., the nation’s biggest company, plunged 8.7 percent in its worst day since the depths of the global financial crisis. About $11 billion was erased from its market value. Sharp Corp. plummeted 17 percent while Toshiba Corp. sank 9 percent.

The pound tumbled to the lowest since 1985 in one of the most dramatic 24 hours in modern British history. The leave camp, led by former mayor of London Boris Johnson, won the referendum with 52 percent of the votes. That sets the U.K. up for years of bitter divorce talks with the EU and deals a body blow to David Cameron, who says he’ll quit as prime minister.

“Everybody is just watching and trying to absorb what’s happening,” Tim Condon, head of Asian research at ING Groep NV in Singapore, said by phone. “A lot of people have been caught off guard.”

Morgan Stanley warned a few days before voting began that a decision to leave the EU will see the Topix plunge 12 percent in two weeks, more than other markets in Asia, because of the yen’s sensitivity to global turmoil. The yen could surge to as high as 90 per dollar by year-end, the brokerage’s strategists led by Jonathan Garner wrote in a note on June 20.

Sea Change

“This is a sea change and has ground-breaking implications,” John Woods, chief investment officer for Asia-Pacific at Credit Suisse Private Banking, told Bloomberg TV in Hong Kong. “It’s highly likely that we see monetary easing in a coordinated response” from central banks across the world, he said.

Bank of Japan Governor Haruhiko Kuroda was scheduled to be in Switzerland as the results on Brexit were announced. The BOJ will continue to carefully monitor how the result would affect global financial markets, Kuroda said in an e-mail from the central bank.

For Stefan Worrall, director of equity cash sales at Credit Suisse Group AG in Tokyo, the next few days will be crucial in determining whether the market can bounce back from Friday’s drop or if it becomes something more substantial. He echoed sentiments expressed by the Daiwa traders in Tokyo.

“Certainly it has been a pretty amazing day,” Worrall said. “Everyone was explaining that they were watching history being made.”