J.P. Morgan: Japanese stocks rebound as fresh buying is awaited: CTAs stop selling and watch, while AI earnings have yet to lift the whole sector

Who is driving the rebound in Japanese stocks?

On 29 October, as long-term interest rates in Japan and overseas stabilized, the Nikkei Stock Average continued to recover toward 64,500. JPMorgan observed that investors such as CTAs appeared to have identified a temporary bottom around 62,000 and stopped selling, but had yet to start buying futures.
The cash market is currently leading the advance: Advantest surged on strong results from the previous day, lifting the Nikkei. Individual stock movements are also keeping intraday index volatility high.

The market’s focus is shifting from macro events to AI company earnings, but overseas results and market reactions have diverged. JPMorgan believes earnings quality is currently doing more to differentiate individual stocks and has yet to provide the impetus for a broad expansion in AI semiconductor sector valuations.
As of 28 October, a Japanese equity market sentiment indicator had stopped falling but remained slightly negative; Korean stocks and major US cloud computing companies have a significant influence on the indicator. The performance of global AI-related stocks could therefore affect whether Japanese stocks regain upward momentum.

JPMorgan estimates that global CTAs and macro hedge funds reduced some of their previously accumulated equity longs in October, but remained net long overall, supported by global economic resilience. As of 28 October, their developed-market bond shorts were down about 30% from their recent peak.
Two types of investors have diverged in Japan: CTAs closed their long Nikkei futures positions in October, while macro hedge funds bought more Japanese stocks on dips, apparently betting on a year-end rebound. The bank believes these top-down investors’ positions are an important force in determining the index’s direction.

JPMorgan believes bond position adjustments are nearing completion and pressure to deleverage portfolios overall is easing, helping the index become more resilient during declines. But sustaining the rally requires a broad expansion in AI semiconductor stock valuations or renewed willingness by macro investors to take risk.
If these investors regain confidence that rising stock prices can coexist with weaker bond prices and interest rates remaining relatively high for a prolonged period, they may rebuild equity positions. The bank’s CTA positioning chart shows that CTAs may relever if the Nikkei recovers to around 66,250.
Following the European Central Bank and Bank of Japan policy meetings and the US midterm elections, attention will turn to whether CTAs currently on the sidelines begin buying.