Yen

The divergence theme is likely to strengthen in the week ahead.  

Having completed his militarist plans, Japanese Prime Minister Shinzo Abe appears to have gone full fantasy-tard with his latest "plans" for the demographically-dead and debt-destroyed nation. "Creating a strong economy will continue to be my top priority," Abe said, a goal he has stunningly under-achieved as Japan heads for its 5th recession in 4 years, but, as Bloomberg reports, it is his new "arrows" of economic hope that has left analysts scratching their heads - 20% economic growth (when its gone nowhere for years), a higher birth rate (as the aging of the nation accelerates and interest in sex plunges), and allegedly a goose that lays golden eggs (well why not?). The collapse of Abe's approval says it all about his 'plan'.

Yellen's reaffirmation of a likely rate before year-end helped lift the dollar.  Look for some consolidation ahead of the US jobs data.  

The market, which clearly ignored the glaring contradictions in Yellen's speech which said that overseas events should not affect the Fed's policy path just a week after the Fed statement admitted it is "monitoring developments abroad", and also ignored Yellen explicit hint that NIRP is coming (only the size is unclear), and focused on the one thing it wanted to hear: a call to buy the all-critical USDJPY carry pair - because more dollar strength apparently is what the revenue and earnings recessioning S&P500 needs - which after trading around 120 in the past few days, had a 100 pip breakout overnight, hitting 121 just around 5am, in the process pushing US equity futures some 25 points higher at last check.

Japan is a useful analog in so many ways, not just about what the US and global economy can (has already?) become if allowed to follow into this same circle of Hell. It pretty much proves the incapacity of orthodoxists toward anything outside of their so very limited understanding and appreciation.

Quantitative easing, as this policy is known, has bailed out bonus-happy banks and made the rich richer.  Banks have been the biggest beneficiaries, with their 20- or 30-times leveraged balance sheets. Asset managers and hedge funds have benefited, too. Owners of property have made out like bandits. In fact, anyone with assets has grown much richer. All of us who work in financial markets owe a debt to QE.

As of today you really can pay your taxes, your credit cards, your mortgage, shop at Costco, and buy your groceries without so much as a bank account while using sound money.

Non-bombasitc overview of the investment climate.  No, the sky is not falling.  This is not the end of days.  

Most just scoff at the notion that there has been a historic global Bubble, let alone that this Bubble has over recent months begun to burst. Talk of an EM and global crisis is viewed as wackoism. Except that the Federal Reserve clearly sees something pernicious in the world that requires shelving, after seven years, even the cutest little baby step move in the direction of policy normalization. The Fed and global central banks responded to the 2008 crisis with unprecedented measures. When the reflationary effects of these policies began to wane, the unfolding 2012 global crisis spurred desperate concerted do “whatever it takes” monetary stimulus. This phase has now largely run its course, and there is at this point little clarity as to what global central bankers might try next.

The divergence meme that is the center of the dollar bull narrative was never predicated on precise timing of Fed's lift-off.   To go from no hike in September to Fed will never raise interest rates, or QE4 is next, is a needless exaggeration.  

Now that the Fed appears to have made a grave policy error judging by the market's initial reaction, it is up to the ECB and BOJ to step up (even if as we warned two weeks ago both are running out of monetizable material) and try to preserve some confidence, i.e., halt the selling. Sure enough, that is precisely what happened earlier today when infamous ECB board member and hedge fund leaker Benoit Coeure hinted that if only the market drives 5Y5Y's even lower, i.e., inflation expectations, the ECB will have no choice but to boost QE.

What was one "one and done", just became "none and done" as the Fed will no longer hike in 2015 and will certainly think twice before hiking ahead of the presidential election in 2016. By then the inventory liquidation-driven recession will be upon the US and the Fed will be looking at either NIRP or QE4. Worse, the Fed just admitted it is as, if not more concerned, with the market than with the economy. Worst, suddenly the market no longer wants a... dovish Fed?

Below we show what the latest, September, response is to the question "what investors consider the biggest tail risk" as well as evolution of this answer in the three months preceding. Curiously both #1 and #2 risks, namely "China recession" and "EM Debt Crisis", are an indirect function of the recent and ongoing surge in the dollar, which will likely be exacerbated should the Fed indeed launch its first rate hike cycle in 9 years.

The evening started with disappointing Japanese trade data cross the board - weakest imports, exports, and trade balance in 6 months - which follows the largest selling of Japanese stocks by foreigners ever. China opened with the first rise in margin debt in 6 days, stocks were lower  in the pre-open after last night's epic farce ramp. PBOC strengthened the Yuan fix modestly and also injected another CNY 40 billion.

"Every day brings another reason why the Federal Reserve should hold off before raising interest rates... First and foremost there was the recent plunge in stock prices."