JPYEUR Dumpage, Equity Markets Still Unaware

Tyler Durden's picture

The only primary driver to market movements, the carry trade, especially as visualized by the JPYEUR, just got poleaxed. Equities, which operate in a universe of their own when they so choose, are not following. Yet. Gold is rallying as all "carried" currencies suddenly feel weak.

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stormsailor's picture

looks like the /es just broke to the downside.

Orly's picture

I was glad to be short EUR/JPY on that move.

Still don't know what that was all about, though.  Any ideas would be appreciated.

monmick's picture

 

Japan mulls monetisation of public debt and yen devaluation Japan’s ruling party has called for drastic monetary easing to devalue the yen by 30pc and halt the slide into deflation, putting it on a collision course with the Bank of Japan.

By Ambrose Evans-Pritchard
Published: 6:00AM BST 14 Apr 2010

Comments 6 | Comment on this article


Lawmakers from the Democratic Party of Japan called for the exchange rate to be steered to ¥120 against the dollar, from around ¥90 currently. Photo: Bloomberg

A draft by 130 lawmakers from premier Yukio Hatoyama’s Democratic Party of Japan said the country needs a radical shift towards growth policies, calling for an inflation target above 2pc. The exchange rate should be steered to ¥120 against the dollar, from the current ¥90.

Shizuka Kamei, financial affairs minister, said the central bank must monetise government debt to support the market for state bonds and prevent deflation becoming deeply lodged in the economy.

The Bank of Japan’s governor, Masaaki Shirakawa, told lawmakers that it would illegal to fund state spending by printing money. “History has proven that central banks directly buying government securities caused severe inflation and dealt a blow to the economy. The BoJ is now providing adequate funds,” he said.

Tokyo is still able to issue 10-year bonds at ultra-low rates of 1.4pc, relying on a captive savings market, even though gross public debt will reach 225pc of GDP this year, the highest in the world.

However, there are growing fears of a “malign scenario” where rising rates set off a debt compound spiral. The IMF has warned that borrowing costs may rise sharply as Japan’s aging crisis bites in earnest.

Junko Nishioka, an economist for RBS, said the BoJ is haunted by hyperinflation after World War Two. It is afraid debt monetisation could back-fire, triggering the very crisis that everybody fears. “We don’t think a fiscal accident is likely yet. Pension funds will keep buying debt for another five or six years. After that pressure increases,” she said.

HarryWanger's picture

Equities will continue to rally on what has been, I admit, surprisingly strong news on the economic and earnings fronts. You can look for reasons all day long in obscure relationships but just step back and look at the strength here. It's real. 

I was caught off guard until about a week ago then figured it out. We're on our way to testing 2007 highs. We're sitting in a sweet spot right now. No inflation yet so no rate hikes. Money keeps pumping. 

Now the retail guys will start jumping in for the run to new highs. Just look at the volume today to back up this move. Pretty impressive. Until Dow 14k hits, you have to stay long, as hard as that my be or seem.

Cyan Lite's picture

Totally agreed.  I think it will take until late 2011 or 2012 to get back to 14k on the Dow (~1575 on the S&P) but we will get there.  Many folks I know that are within a decade of retirement are all-in with equities when they should be scaling back to bonds.

ZeroPower's picture

Why wouldnt they be all in if you suggest such movement back to all-time highs. Youd be a fool not to be in.

Though whether or not their retirement funds will be sustained after their decade is another story...

GFORCE's picture

This is not 'REAL'. The recovery is already priced in. You can't keep rallying on every piece of good news and ignoring the risks that are around. Late 2009, we were rallying to price in sustainable recovery and now it's a low volume creep to overbought levels. Yes, there was volume today due to the figures but this is not a leading indicator. The markets are exhibiting the exact same 'all news is good news' move that they did in 2007 before the crash.

Retail sales are a lagging indicator. Any sovereign fallout and the consumer will panic and retrench like they did a year or so ago and the effect on credit would be far worse to businesses and banks as the public will not stand by and watch more trillion dollar bailouts.

Unfortunately, after all the crisis, we are back at multi-asset carry bubble II. The fallout from this will be severe. Anyone buying stocks up here for their retirement needs their head examined.

Jeff Lebowski's picture

My experience as well.  Everyone close to retirement is letting it ride to try to get their accounts back to where they were in 2007.

Nightclubs are also fun, until someone yells "fire".

 

 

 

Internet Tough Guy's picture

No inflation? Oil heading for 87, coal at record high, grains up. Just don't eat, heat, cool, or drive.

reading's picture

+1 Trillion

We heard the same no inflation message the last time oil crossed $100 and we all see where that ended.

 

Hephasteus's picture

Rams up 30 percent in price over the last couple months. Intel has a completely delusional 1Q report claiming huge sales and huge profits while simultaneously claiming that they sold less cpu's and more chipsets during that quarter. Something which doesn't happen. Food up, gas up taxes up. Looks like it's going to be a tree fiddy a gallon summer.

 

reading's picture

If you have ever worked at a technology company of any size (and I mean any small, medium or large) they use an amazing amount of tactics to "make" their number.  

VegasBD's picture

Bleh, come to LA, crossed 3.50 a while ago. And in vegas its even worse.

Orly's picture

Okay.  It looks like when the USD/JPY broke support to the downside, it took the EUR/JPY along with it.

This could be the big move I was waiting for in the USD/JPY to re-test the lows.  One more bounce off the bottom, then the dollar skyrockets against the yen.

Get long USD/JPY at 84.00...and don't look back!

GFORCE's picture

The short positioning in JPY is the highest since late 2007 when it unwound massively. A china reval would be hugely supportive to the JPY. Bear in mind that they also have a surplus. I would maybe sell the Yen but I certainly wouldn't sell against the USD. It's a 50/50 call- high rates or u.s. default- which first?

Orly's picture

Actually, my reasoning goes back to my theory about the FX swaps that the Fed did in March of 2009, when they sent a half-trillion dollars overseas to support holders of USD-denominated assets, particularly in Europe.

Since that time, the USD tanked and rebounded, then the Euro tanked and rebounded.  Now, it is the turn for the yen to maintain strength, while the Euro and the dollar stabilise at a "normal" level.  It is my belief (without any proof whatsoever...) that all of this is being done to delay the inevitable crash of the Great British Pound Sterling and the Bank of England.  Extend and pretend some more.

Seems the BoE got caught with its pants down big-time in making loans to Iceland and Spain/Portugal while their own people went down south and bought real estate as quickly as they could in sunny climes.

So, there is still a half-trillion dollars out there that has yet to be repatriated- if it ever will be.  The money is swapped, so it is not like that cash is a half-trillion dollar profit for the Fed.  We swapped it, though, when the USD was launched 2/2 risk aversion, so when we do get the money back, it will be at a significant haircut.

Don't expect the weak Chinese consumer to save the Japanese, either.  Revaluing the renminbi higher is not going to happen anyway- at least not any time soon.  Japanese products will still remain pretty expensive for Chinese consumers.

What is going to have to happen in Japan is that they will have to tap savings to pay off their demographic anomoly.  Japanese government bonds are owned by most everybody in Japan.  Too many retirees and not enough workers. There is just no way around that.

The kicker is that the Japanese government will have to then raise interest rates in order to attract new investment and roll their debt.  With that, massive repatriation of wealth will occur as the carry trade in the yen dies an agonising death.  With that out of the way, they will be free to allow the yen to depreciate, especially against the US dollar.

Ironically, this will not at all be the death-knell for the Japanese economy.  It will be a rebirth and renewal of the Japanese export-driven juggernaut.

When the proper time comes, get short the yen and long Honda Motor Corporation.

:D

Cyan Lite's picture

DXY is getting squashed, that's why equities are rallying...

HarryWanger's picture

That's part of it for sure as it has been. But now you have strong data to back it up:

-Inflation tame

-Manufacturing a multi year high

-Retail Sales up strong

-Corporate earnings very strong this week (AA always an exception)

-Job (even subtracting out census workers and birth/death) are gaining.

-Fed continuing to pump money.

There are a lot of reasons why equities continue higher and will continue to challenge the 2007 highs. Believe me, I know it's hard to come to grips with that but once you do, it makes perfect sense.

reading's picture

While I can appreciate your enthusiasm there were many who felt the same way in late 2007.  Inflation is far from tame if you include the cost of getting to work (if you have a job) and the cost of buying food, Retail sales are up "strong" but are not even at the level of last year, Corporate earnings -- let's revisit that a little further into the season, maybe you are right, maybe not.  Jobs without census and seasonal adjustments did not gain.  And we all know the fed is still pumping, but is also running out of bullets.  

 

Let's not kid ourselves, once you've had enough to drink you NEVER think the party should be over regardless of how much of an idiot you are making of yourself.  

 

geminiRX's picture

Are you really that confident that government data is accurate? Most zero-hedgers concur that data has been manipulated. You seem to be forgetting that the financial crisis has not been fixed. Nothing has been marked to market. There are more holes in this economic dam than there are pieces of bubble gum. Call me crazy, but I don't subscribe to this sort of cheerleading. It won't be long until the rug is pulled out by some surprise event.

HarryWanger's picture

Again, I'm not cheerleading, just playing what the market it giving and telling me. Whether you believe the numbers or not, the market will continue higher. There is no reason to pull the rug out until you've sucked people into the new all time highs. 

Apply Force's picture

I do not disagree with your conclusions necessarily - that equities will continue to rise, but I differ greatly as to the interpretation of your "indicators"...

 

- Inflation tame... in things we don't need or that require a loan of any kind.  Food, gas, insurance (of any kind), and soon to be taxes - all on the rise.

 

- Manufacturing at a multi-year high... That's like saying my closet is clean when the rest of my house is filthy, and that the government (ie. tax payers) helped me clean said closet.

 

- Retail sales up strong... Tax receipts paint a different picture, no?  Sales up in stores with no competition left, as so many have closed for good.

 

- Corporate earnings strong this week... again, spillover from the closings in the point above as well as profits outside the U.S.  How about those YOY revenues?

 

- Jobs are gaining... maybe re-phrase to jobs are disappearing more slowly... what is the break-even point for flat unemployment?  + 100,000?  +150,000??

 

- Fed continuing to pump money... FINALLY!  A point we can agree on!

 

I feel these indicators point to continued wealth destruction - you may be able to profit now, but certainly prepare for the inevitable.  The data you bring up can have a skewed perspective (in either direction, perhaps).  Reality will be faced.

Orly's picture

And again...

This is a liquidity-fueled rally, meaning that risk-aversion gets a lot easier when you're playing with cheap money.

So, the DXY is getting crushed because equities are rallying, not the other way around.

Internet Tough Guy's picture

Rally? Equities up .5%, oil up 2%. So what's rallying?

Orly's picture

Equities have been rallying on liquidity since March of 2009.  Overlay a graph of the EUR/JPY on the SPX and you have a statistical match.

Kina's picture

The rally has been just about every single day...regardless of any real world data.

 

Quaint notion equating real world economic data with movements in the DOW. That hasn't been the case for a long while. There is no connection between the performance of the markets and the actually health of the US or world economy.

EyesWise Shut's picture

On the JPY, if Japan should struggle with debt financing wouldn't they first start repatriating overseas assets thus fuelling JPY-strength?

Orly's picture

I am counting on it...

:D

dudley's picture

Even the PPT knows that they need to keep a lid on stocks.  I am betting that they would prefer a small to medium drop followed by consolidation and stability than a little more upside followed by a melt down.

Igor AKA 990's picture

see you just don't get it... if there is some 'bellwether' indicator you follow for the ES it will only work if it is a bullish indicator.  If it is telling you to short ES, the relationship will then be ignored.  Hurry up and BUY

 

 

Orly's picture

There is very strong resistance at SPX1228.  Once that level is reached and you get a turn-down in the RSI with a Stochastic cross, that will be your "malweather" indicator to get short.

Sell Euros at that point any which way you can while simultaneously shorting dollars against yen.

Make you rich.

:D

HarryWanger's picture

That will be our first pull back of up to 5%. I've been saying this as well. But that will be the extent of it - no more than 5%. Then the next leg higher. Barring a war or something major like that. No, Greece does not fit the bill for a major event.

trav7777's picture

Devaluation must occur...Japan is the heaviest in debt, so watch them for signs on what will come this way too.

dudley's picture

The one and only way they have so far found to get money out to Main St. is via the stock market and associated retirement funds.  For that to continue to work they have to get the market back from being overbought to a more neutral stance but at these higher prices they are better off with a  5-10 % correction that is managed rather than a larger one they have difficulty in controlling.  Politics/corruption/insider dealing, all these aside - these people aren't stupid.  Anyway, I may go down with the ship but I am buying DXD.

HarryWanger's picture

Risky move in a market that is up on stronger volume. I'm long DIA, SPY, AAPL and staying that way until at least 1225 area. Then I'll lighten up on a slight pull back and prepare for the inevitable next move higher.

Deep's picture

stronger volume? What screen you looking at

HarryWanger's picture

SPY having strongest volume day in quite a while. Dow same. 

Today marks a turning point as far as volume is concerned and part of the reason I'm so optimistic that we will head toward new all time highs sooner than most think. Up until today, bigger volume was only on down days. Now we're seeing good volume on an up day. Something that hasn't happened in quite a while.

dudley's picture

It is always a mistake to over estimate the mental capacity of the powers that be so I definitely will not make this my last stand but for all the valid points about manipulation etc, whoever has been managing the stock market has to be pretty sharp to have got it to where it is in the face of what has been going on.  For the bad guys to keep winning we need to see a sell off in gold and silver so they can cover.  So it would not surprise me if we saw some bad news to trigger a general liquidation for a few days. If we dont see a drop in the next day or so I will take my licking and go home.

InstantWinner's picture

No one knows if stocks are going up or down.  Except Goldman of course.

Jim in MN's picture

Somebody help me with this theory:

Use the financials as sock puppets to drag the indicies up.

The real pigs in the holdings of big institutions--GE, MSFT--eventually get dragged up too.

Unload to...whoever gets sucked in to buy.  I always assume this means 401(k) marks, but any of the 'spooked sideline cash' players.  Also bond market pension managers needing more return.

 

Then....let it go.  The problem has been it's taking too long and the big pigs are just now starting to get dragged off of the floor, even GE getting near $20/share and $200 billion market cap (used to be north of $350 billion, get it?)....I don't think the liquidity is coming from the carry trade now, it's the Fed (AKA taxpayers) killing fixed investment returns and giving cheap cash to the TBTF blimpies.  They take from one pocket until we get out the 401(k) wallet...then they take from that pocket too.

This market is a pinata with a big 'KICK ME' sign on it.  And the same sign is on our backs.

Orly's picture

That seems to be the plan.  And I am glad that someone sees it as a liquidity-driven rally as opposed to a carry phenomenon.

Since today is a relatively high-volume day, it would be easy to see if the big money managers are waiting for the retail investors to pick up the slack.  Watch Accumulation/Distribution data.  If higher volumes return as the market rises, then the big boys will be in net distribution (according to your theory...) as they hand the shit-bags to the home-gamers.

dudley's picture

I just noticed that Nadler is talking about gold topping out ( again ).  When he gets bullish that will be the biggest bear signal you have ever seen.

Szydkid's picture

Is it just me or has anyone else noticed the "moves" are happening during US hours now?  OK, skip the Greek extension last weekend.  But apart from that . . .

Cognitive Dissonance's picture

Just another day in lala land.

SheepDog-One's picture

Yep Cognitive Dissonance, even many Zerohedgers are now on the side of believing the fake polished turd data from all the liars, and it all balances on continued 0% interest nitro methane money printing, which BTW is inflation. Even Zerohedge types are saying 'inflation is tame', forgetting that inflation is an increase in the money supply. Only reason it hasnt reflected in price is the banks are hoarding it, buying 2% bonds and running the entire markets off just that!

People can say they have a handle on it, and things like 'WHEW sure am glad I was short the USD/JPY thingy', but I dont believe this banter that DOW 14,000 last bubble levels will soon be regained. They have something far more interesting planned I think.

Its a trap! This FED pumping was pegged on the hopes of a top handoff to retail, and I dont see that happening at all meaning the FED is looking at being a $2 trillion (that we know of, probably FAR higher) bagholder unless they can divert everyones attention. Did everyone forget the Treas salivating about seizing everyones 401K's and pensions? Nah Im not so giddy as most these days, I think theyve got some nasty tricks up their sleeve theyll spring on us soon.

 

mynhair's picture

Great volume, until you throw out the 50% contributed by the Zombies.

THE DORK OF CORK's picture

Good article today on financial times about the rising price of coal

Cannot understand why Japan refuses to accelerate its nuclear programme - and forget about subsidising cheap exports to the west.

They will suffer badly if they do not have some degree of energy independence