Bond

It seems the correlation to USDJPY has started to disintegrate and what is more worrisome for the BoJ is the linkage between JGBs and the Nikkei 225. Equities in Japan are about to open to a modest bounce around 1.5% but JGB prices are down around 0.50 (half the limit-down price moves). So, the problem for the BoJ is - do you let JGBs flop to maintain your equity market's appearance of normality? Or are Japanese stocks about to be as implicitly repressed as the bond market? It would appear TPTB are doping their best to ramp the JPY to keep this bounce alive (USDJPY opening just shy of 102.50).

*AMARI SAYS 'ABENOMICS' IS PROGRESSING STEADILY (this is progress?)
*AMARI SAYS BOJ IS COMMUNICATING CLOSELY WITH MARKETS (we suspect the market is communicating back even more)

"Central bankers dream of getting back to "normal" – normal interest rates, a normal balance sheet, and so on. But that point isn't going to come any time soon. They are stuck on a money printing treadmill, and there appears no way off.

One can read "The Lethal Presidency of Barack Obama" to get a true sense of Obama's "the best defense is a relentless drone everyone offense, ignore collateral damage and take out a few Americans in the process" policy. Or one can stare at rising stawks and enjoy their Obamaphones. Obe can't have both.

The surge in Japanese long-term interest rates is likely causing some lost sleep among bond market participants and policymakers (despite their ignorance of the moves in the BoJ minutes) as Nomura's Richard Koo notes, if this trend continues (now added to by the collapse in stock prices) it could well mark the “beginning of the end” for the Japanese economy. Although the stock market has (until now) welcomed the yen’s continued slide against the dollar, Koo warns that this trend needs to be carefully monitored, as simultaneous declines in JGBs and the yen can be interpreted as a loss of faith in the Japanese government and the Bank of Japan. The biggest concerns are that the extreme volatility in Japanese stocks and bonds is occurring at a time when the BOJ was buying large quantities of government bonds. It is now clear that even large-scale BOJ purchases of JGBs cannot stop yields from rising. Simply put, Koo notes, the BoJ needs to rein itself in and state it will not stand for overshooting inflation expectations or the 'bad' rise in rates could crush both the nascent recovery and the nation's banking system.

As Japan has indicated, when bonds start to plunge, it’s not good for stocks. Today the Japanese Bond market fell and the Nikkei plunged 7%. The entire market down 7%... despite the Bank of Japan funneling $19 billion into it to hold things together.

A data-based look at the financial context of the past 30 years from the perspective of Gen X.

Today’s AM fix was USD 1,386.00, EUR 1,074.92 and GBP 919.16 per ounce.  
Yesterday’s AM fix was USD 1,385.25, EUR 1,071.43 and GBP 917.75 per ounce. 

Once again: The FOMC minutes had nothing to do with overnight's events, especially since both Ben Bernanke and Bill Dudley made it very clear previously that for any tapering to occur (and which is supposedly bullish according to David Tepper, who may finally be done selling to momentum chasers) if ever, the economy would have to be be stronger (which is of course a paradox because it is the Fed's QE that is making the economy weaker). If anything, the minutes reminded us that there is a mutiny in the FOMC with finally someone having the guts to say on the record that Bernanke is blowing a bubble - something never seen before on the official FOMC record. And after all, the Nikkei opened way up, not down. It was only after the realization of what soaring bond yields mean for, wait for it, stocks (despite central planner promises that it is soaring bond yields that are a good thing - turns out, they aren't) that the sell-off really started. That, and of course copper, and the end of the Chinese Copper Financing Deals arrangement that has been China's illicit cross-asset rehypothecation scheme for years (more shortly). So in a nutshell, here is what has transpired so far, courtesy of Bloomberg.

Yesterday afternoon, following the rout in the US stock market, we made a spurious preview of the true main event: "So selloff in JGBs tonight?" We had no idea how right we would be because the second Japan opened, its bond futures market was halted on a circuit breaker as the 10 Year bond plunged to their lowest level since early 2012, hitting 1% and leading to massive Mark to Market losses for Japanese banks, as we also warned would happen. That was just the beginning, and suddenly the realization crept in that the plunging yen at this point is not only negative for banks, but for the entire stock market, leading to what until that point was a solid up session for the Nikkei to the first rumblings of a ris-off. Shortly thereafter we got the distraction of the Chinese Mfg PMI which dropped into contraction territory for the first time since late 2012, and which set the mood decidedly risk-offish, although the real catalyst may have been a report on copper from Goldman's Roger Yan (which we will cover in depth shortly) and whose implications may be stunning and devastating and may have just popped the Chinese credit bubble (oh, btw, short copper). And then all hell broke loose, with the Nikkei first rising solidly and then something snapping loud and clear, and sending the index crashing a massive 1,143 an intraday swing of 9% high to low, leading to an over 200 pips move lower in the USDJPY, and leading to a global risk off across the world.

UPDATE 1: They are panicking... BOJ injected 2 trillion yen ($19.4 billion) into the financial system to stem volatility following a circuit breaker in JGB futures trading.

UPDATE 2: Nikkei 225 is now down 1500 points from its highs and down 1150 (over 7%) from yesterday's close

UPDATE 3: The Final closing data is a disaster with JPY surging back to 101.50 (carry trades getting baumgartner'd everywhere), stocks down over 7%, and 10Y JGBs swinging from +11bps at the open to -6bps at the close for the second biggest range day in a decade...

All the time it is just the quadrillion JPY second-largest bond market in the world that is experiencing volatility on an unprecedented scale, the BoJ and her partners in crime are more than willing to 'officially' say "please do not worry." But when the equity market - that barometer of everything good and holy about Abenomics starts to crater, you can bet the excuses will come fast and furious. Today's drop of over 1500 points (over 9%) from the earlier highs is the largest drop for the Nikkei 225 since March 2011. The Nikkei 225 just lost the all-powerful 15,000 level and is suffering another VaR shock with a 6-sigma move today. In fact given the price levels this drop is on par with the post-Lehman moves in 2008. The question now (with US equity futures also fading fast -20 points and JPY crosses getting hammered) is how will the Japanese risk appetite for peripheral European crap hold up with this crimping in their plan as Japanese bonds and stocks dump?

Japanese government bonds (JGB) futures have been halted once again this evening as the market opens down over 1 point. 10Y yields smash 11.5bps higher to 1.00% and 5Y yields add 6bps to 47bps. These are quite simply unprecedented moves in what 'was' a safe asset class and impresses yet another VaR shock on the market (as we detailed here). What this means practically is that Japanese banks push further into insolvency land (as we explained here) today's move wipes out another 1.5% of blended Tier 1 capital off the entire Japanese banking industry. Since the 10Y JGB yield lows of 32.5 bps on April 5, the move is rapidly approaching a full percentage point, or the parallel shift amount that the IMF warned would lead to 10% and 20% MTM losses for regional and major banks respectively. Today's jump in 10Y yields continues the post-BoJ regime of greater-than-six-sigma moves... something no risk model can withstand for three weeks. Just a good job the BoJ didn't have anything at all to say about this totally disorderly fiasco yesterday.

Anchoring is "our tendency to grab hold of irrelevant and often subliminal inputs in the face of uncertainty." In the absence of reliable knowledge about the future, investors have a tendency to anchor onto something – anything – to help them predict future market returns. And what better anchor to use for future market returns than prior ones? This is where the story gets more intriguing. When looking at the UK stock market in discrete 20-year blocks, the period from 1980-1999 is the only one in the last 300-years in which inflation-adjusted returns averaged between 8% and 10% per year. Investors seem to be anchoring their market predictions to recent returns of the past, therefore buying ‘the index’ expensively, inclusive of a grotesque bubble of credit. One can expect this to end in a train wreck.

As the global equity and bond markets grind ever higher, abundant signs exist that we are once again living through an asset bubble – or rather a whole series of bubbles in a variety of markets. This makes this period quite interesting, but also quite dangerous. This can be summarized in one sentence:  How could this be happening again so soon?

What is 410 words and is released precisely 180 seconds after the FOMC's minutes? Why Jon Hilsenrath's FOMC minute-parsing piece of course. Which we can only assume means Jon was on the "preapproved" list for early distribution and pre-analysis, because not even we can analyze and type that fast. We are confident he did not breach the embargo. Because that would not look good for the Fed already being investigated by the Inspector General for last month's humilating breach.

The last time Hilsenrath was relevant was two weeks ago (in a flashback to those days before QEternity when infinite QE was not assured and Jon's input was actually relevant), when following an article of his, and due to his "proximity" with the New York Fed, many assumed that the Tapering suggested by Hilsenrath was being telegraphed by Bernanke to the market. Turns out it was nothing but yet another baffle with bullshit headfake by a central planning regime that is now merely engaged in observing market responses to indirect stimuli: if reduce monthly flow by $20 billion then X (-1%); if cut QE off entirely then Y (-50%?), and so on. Moments ago the same Hilsenrath just released another piece, which effectively refuted everything his previous piece suggested, and in fact made his position as Fed mouthpiece absolutely irrelevant, courtesy of the following disclosure: "this time, when the Fed shuts off bond buying, it won't be... predictable." He goes so far as to say that the term "tapering" is no longer even applicable! Funny that, considering on May 11, none other than Hilsenrath said: "Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy."