U.S. Markets open in 3 hrs 41 mins

Japan ETFs Vulnerable After Nikkei, Topix Slide


ETFs tracking Japan, the world’s third-largest economy, slumped Thursday in U.S. trade after a late-session slide sent Japanese shares tumbling to their worst one-day performance in more than two years during Thursday’s Asian session.

Japan’s Nikkei 225 plunged 5.5% while the Topix Index slid 6.9% after HSBC’s flash reading of China’s Purchasing Managers’ Index for May fell to 49.6. HSBC’s April PMI reading was 50.4. Readings below 50 indicate contraction and the May flash reading is the first time since October that China has dipped below that mark.The new orders index fell to 49.5, the worst reading since last September. China’s official PMI data will be released next week.

That data point prompted a stunning reversal in Japanese stocks, which opened the session higher. Japanese equities are Asia’s best performer’s this year, which has benefited ETFs such as the WisdomTree Japan Hedged Equity Fund (DXJ) . Japanese Prime Minister Shinzo Abe’s campaign to weaken the yen and drive inflation to 2% has helped make DXJ 2013’s top asset-gathering ETF.

In late 2012, the ETF did not even have $900 million in assets. It entered trading Thursday with almost $10.8 billion on the back of a year-to-date gain of 38.4%. [Yen Hedged ETFs Soar As Nikkei Tops 15,000]

The rival iShares MSCI Japan Index Fund (EWJ) was up 21.4% year-to-date heading into Thursday, but suddenly DXJ and EWJ look vulnerable following the volatility in Thursday Asian session.

DXJ plunged 8.4% on volume that surpassed its daily average less than 25 minutes into Thursday’s session. EWJ tumbled nearly 8% on volume that is already nearly half the 40.8 million shares per day average seen over the trailing 90 days.

The larger decline for the Topix is weighing on the iShares S&P/TOPIX 150 Index Fund (ITF) . ITF, which has $110 million in assets, has been a stealthier play on resurgent Japanese stocks this year. ITF is down 9% early Thursday. However, the ETF tracks the S&P/TOPIX 150 Index, potentially making it vulnerable to selling pressure today that could erode its over 19% 2013 gain. [Taking A Bold Move With Japan ETFs]

Japanese bond ETFs are also in play after the Bank of Japan had to roll-out a $19 billion fund-supplying operation after Japanese government bond yields hit their highest levels in nearly a year.

The BOJ’s financial operations division said in a statement the operation to provide fixed-rate short-term loans to financial institutions was to respond to “the unreasonable increase in the volatility of long-term rate,” reported Eleanor Warnock for MarketWatch.

Lower bond yields have been viewed as pivotal to BoJ’s recently announced monetary stimulus program, but yields have instead steadily risen. In just the past month, the Powershares DB 3x Inverse Japanese Government Bond ETN(JGBD) is up almost 7%. JGBD tracks an index that is intended to measure the performance of a notional short position in 10-year JGB Futures. The ETN is down 2.4% on volume that has already eclipsed the daily average.

ETF Trends editorial team contributed to this story.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.