The aftermath of the largest liquidity injection process in the history of the world, is that politics, and the entire fiscal process, has effectively been rendered obsolete, and politicians are now nothing but figureheads in a central banker world. Perhaps, the general public would be angry if it were to realize that the only entity left making global macro economic decisions is a private organization run by academics, who in turn are merely firgureheads for the world's private banks. That, however, would entail that the co-opted media would actually explain to the broader population just what is going on behind the scenes: a process that would entail the loss of core advertising revenue, which is why expect confusion about just who pulls the strings to linger for years.
Price action in the foreign exchange market. Discuss.
Succinctly summarizing the positive and negative news, data, and market events of the week...
So the Fed is essentially handcuffed at this point. Increasing QE in any way risks a Japan-bond market style rout.
Japanese stocks had another violent night with record trading volumes on the TOPIX. The early 'buy the dip mentality' rapidly escalated into sell-Mortimer-sell as the Nikkei 225 dropped another 1000 points after the lunch break. A late day recovery managed to close the index just in the green and all could relax that the world was once again a better place thanks to Abenomics. However, since Japan closed, Nikkei futures have been sold aggressively now testing back down towards overnight lows.
"The last 36 hours have perhaps been evidence as to what might happen if stimulus is withdrawn before the global recovery has been cemented and what might happen if Japan makes mistakes along the way to their attempted new dawn. With the Chinese data still ambiguous, Europe still in recession, Japan in the very early stages of a growth experiment and with the US recovery still historically very weak one has to say that liquidity has been the main market fuel in recent months. So central banks have to tread carefully and the Fed tapering talk and the BoJ's seemingly benign neglect policy towards JGBs has had the market fretting." - Deutsche Bank
UPDATE 1: Japanese stocks turned negative (NKY -600pts from highs, -1.5% on day; and TOPIX down over 4% from highs); Japanese banks -11% from yesterday highs; S&P futures down 10 points from after-hours highs...
UPDATE 2: *KURODA WANTS TO AVOID INCREASING VOLATILITY IN BOND MARKET (yeah thanks... as useful as saying "we all want to avoid syphilis")
UPDATE 3: Nikkei 225 Drops below 14,000 - TOPIX down 11% from highs
For the second day in a row, and in spite of comments from Abe and Kuroda on communicating with the market (as Kuroda says BoJ Monetary easing sufficient), Japanese capital markets are out of control.
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.
If JGB investors 'believe' as Richard Koo earlier noted, in the BoJ's new actions and Abenomics (to double the monetary base and generate inflation), then, Kyle Bass explains, a rational investor is likely to sell a portion if not all of them. The BoJ only has JPY10 trillion cushion (after the JPY60 trillion deficit) to soak up this 'rational investor paradox' selling and this is dwarfed by the holdings of JGBs in the largest Japanese banks (who are now starting to rotate away from JGBs into foreign bonds). Simply out, Bass exclaims, they are going to have make the plan even bigger... if they are to successfully contain rates. With a quadrillion JPY of JGBs out there, if a mere 5% is sold (from 'Abe'lievers) then Japan's Turbo QE is not big enough which leads to the paradoxical increase in the QQE, moar inflationary 'belief', and moar selling pressure... The BoJ has been in the market every day but 2 since April 4th trying to hold rates down (and is failing)...
Two years ago it was only gold and silver that saw the CME's wrath on a daily, and sometimes hourly basis. Back then, however, it was due to soaring prices. Today, it is due to the bone-crushing price collapse in the Nikkei which has just seen the CME hike most Nikkei-related outright futures margins by 33%. So not only will those who resume trading Nikkei-related products in the futures market see a big loss in their P&Ls, they will also have to post some 33% more margin. We can only hope they still have some collateral and aren't margined up 100%. That would not be good for the Japanese pennystockmarket and "experiment" no matter how much good luck Jens Weidmann wishes them.
While the off-the-lows mentality of today's market performance was heralded by most as a signal that the BTFD'rs are back, we gently remind them that the Nikkei (futures) did not bounce at all... In fact S&P futures bounced to a rather eerily perfect 38.2% Fibonacci retracement of the overnight plunge and then faded into the close. All the major indices managed to get back to unchanged on the day (but the S&P 500 was the last to make it and instantly turned around once it did). Credit markets opened gap wider and did not bounce back anything like stocks. Treasuries sold off modestly from their pre-opening levels then drifted lower in yield into the close (ending down 2-3bps on the day but up 6-7bps on the week). The USD weakened most of the day and commodities gained on the day with gold and silver now up over 2% on the week. VIX fell from the open to the close but ended the day higher as we suspect hedges were lifted and exposure reduced into the bounce.
(Milli)seconds after today's market open, utilities NextEra Energy (NEE) and American Electric Power (AEP) did what most stocks in the New Normal do when there is an unexpected event (like a 4 sigma plunge in the Nikkei): they flash crashed. What is different about AEP and NEE is that unlike most other daily stocks that implode in a matter of milliseconds, the collective market cap of the two companies was nearly $60 billion, which in turn sent the broader utilities index down over 10%. Of course, for a few milliseconds it was more like $30 billion: because that is how much in capitalization was lost in under one second, when today's flash crash du jour struck. But fear not: anyone who got stopped out under $76.19 in NEE and under $46.03 in AEP are the "lucky" ones, and the trades were marked as "Aberrant." Alas since that simply means the trades are excluded from daily high and low charts, that is hardly comforting for anyone.
The Nikkei dropped by 7.3% at the end of the day and Hong Kong’s Hang Seng dipped by 2.5%. Shanghai maintained a moderate fall at just 1.2% (if you believe that data now!). The Asian markets are down.
Last night's awe-full plunge in the Nikkei 225 may have come as a shock to many but it was right on cue if one believes in the past as a guide to the future. As ForexLive notes, the striking correlation between the current rampage in the Japanese stock market and that of 1987 is stunning. In 1987, the index had a remarkably smooth 89% rally that began in early November, lasted 186 days, and was followed by a 9.1% correction. Currently, the Nikkei 225 has had a remarkably smooth 85% rally that began in late October and has lasted 191 days culminating with last night's 9% correction. If past continues to be prologue, last night's wipe out should be entirely forgiven within three days and promptly forgotten (as a transitory blip). If, however, this time really is different, well...
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.