1. Nikkei Underperformance Flashes Opportunity 

Through November, the Nikkei 225 has been in the red and underperforming the S&P 500. Japan yields have broken out in the back of the curve with the 30yr JGB yield hitting new 30yr highs. Plans for fiscal stimulus are now juxtaposed with the limits of the bond market. Hawkish rhetoric from BoJ’s Ueda has made December a live meeting. Fiscal expansion is bullish for equities but higher bond vol risks creeping further into risk premia. 

However, Qi shows a sharp dislocation emerging between the macro-warranted Qi model value and spot performance of the Nikkei 255 vs. S&P 500 ratio. The fair value gap is approaching 5yr lows at -1.74 sigma (-9%). Falling US inflation expectations, rising USDJPY and low US real yields have been supportive for the RV model value. 

We highlight that since 2009, there have been 7 events where the ratio has traded at this level of FVG and macro explanatory power (above 60% RSq) – 5 out 7 times the Nikkei outperformed from these levels over the subsequent 3 weeks (average holding period).

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