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Overnight Asian markets were a complete and utter mess and while a seven per cent correction in the Nikkei may be par for the course after an 80 per cent rally, the reasons behind the sell-off have significant implications for Canadian investors.
Three things happened in Asia and the order of operations is important. First, the HSBC reading of Chinese PMI Manufacturing came in below 50 – indicating that manufacturing activity in China is not just slowing, but declining.
Second, Japan's Nikkei 225 equity benchmark was already lower at the time the news was released and selling immediately intensified, taking the index lower by more than seven per cent by the end of the session.
And third, though Japanese ten-year bond prices did not react much in the hour after the China data, as equities fell, bonds saw a big bid that drove yields from 95 basis points to 81 basis points.
For Canadians, the importance of the China data is self-explanatory – a bad sign for the almost 50 per cent of the S&P/TSX Composite Index made up of resource-related companies. Copper prices, for instance, hit an air pocket right after the PMI data and are currently trading 3.5 per cent below yesterday's levels.
The implications of the action in Japanese markets on the country's unprecedented economic stimulus plan is the big issue for global portfolio managers today.
The Financial Times and Wall Street Journal are quoting sources indicating that the selling in equity markets was dominated by retail, not institutional, investors. Further, the same sources also note that professional managers have been taking profits over the past month.
We can normally assume that retail investors were late to the Nikkei party that saw the benchmark climb 80.4 per cent since Remembrance Day. The panic selling Thursday suggests that Japanese investor confidence has not yet recovered despite economic signs that the government expansion policy was working.
The Japanese bond market is the one that has everyone completely confused. The ten-year issue was trading higher by 12 basis points near one per cent before the Chinese data was released. The Nikkei reacted negatively to the jump in yield well before the data.
The Japanese market action before the data release doesn't make much sense, at first glance. The express intended purpose of government stimulus is to increase inflation expectations. The rise in bond yields should have been expected as a sign that monetary stimulus was working. So why did equities start to sell off?
No one yet has a plausible answer. For now, Canadian investors should respect the weaker data from China and reduce the size of their metals and mining positions even though the stocks look cheap. More information and analysis will be needed to figure out what's going on in Japan – we'll just have to dig into the numbers, read everything, and wait.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .
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Scott Barlow