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Global Risk Off: Nikkei Plunges 700 Points From Intraday Highs, Whisper Away From 20% Bear Market Correction
That deep red premarket color on your terminal means it must be a non-Tuesday. Just kidding.
Anyone expecting Abe to announce definitive, material growth reform instead of vague promises to slay a "deflation monster" last night was sorely disappointed. The country's PM, who may once again be reaching for the Immodium more and more frequently, said the government aims for 3% average growth over the next decade and 2% real growth, raising per capita income by JPY 1.5 million. The market laughed outright in the face of this IMF-type silly vagueness (as well as the amusing assumption that Abe will be still around in 7 years), which left untouched the most critical aspect of Abenomics: energy, and nuclear energy to be specific, and sent the USDJPY plummeting well below the 100 support line, printing 99.55 at last check. But more importantly, after surging briefly at the opening of the second half of trading to mask a feeble attempt at telegraphing the "all is well", it rolled over with a savage ferocity plunging 700 points from an intraday high of 13,711 to just above 13,000 at the lows: yet another 5% intraday swing in a market which is now flatly laughing at the BOJ's "price stability" mandate. Tonight's drop has extended the plunge from May 23 to 18.4% meaning just 1.6% lower and Japan officially enters a bear market.
Europe, clearly secondary to yet another night of Japanese fireworks, reported a second estimate of GDP at -0.2%, same as the previous and same as expected: sorry folks, the recession is going on, despite Rajoy's obvious attempts to put the upward thumb on Spanish economic data, with Spain's Service PMI coming at a laughable 47.3 from 44.4 previously, the highest in 23 months. Other Service PMI readings were largely weaker than expected (Germany 49.7, Exo. 49.8, Italy 46.5, Exp. 47.5, France 44.3, Exp. 44.3), leading to the broader Eurozone Service PMI number printing at 47.2 vs Exp. 47.5. Most importantly, and proving there is no recovery on the European horizon as long as the lending machinery remains clogged up was Eurozone retail sales, which plunge from a -0.2% change in March to -0.5% in April. However, none of the above will matter once the Japanese carry trade dynamics change as Abenomics begins to be faded much more more aggressively in the coming weeks, resulting in a first slow then fast blow out in peripheral yields. Then the real "post-fauxterity" fun begins.
Summarizing the news in bulletin format via Bloomberg:
- Dollar Index little changed as markets await further clues ahead of tomorrow’s ECB meeting and U.S. nonfarm payrolls Fri. USD/JPY declines on disappointment over Abe’s speech while GBP/USD gains on better than est. U.K. PMI services.
- Today: U.S. ADP employment change for May due, est. 165,000; April factory orders est. +1.5% M/m; Fed Beige Book released
- Euro-zone 1Q final GDP showed -0.2% contraction; euro-zone final services; composite PMIs remained unchanged at 47.7 in May
- U.K. PMI Services index rose to highest since March 2012; making it less likely BoE further actions are needed, ING says
- Abe vowed to “slay deflation monster” with fiscal, monetary policy; USD/JPY fell to weakest in 2 days on comments
- Fed’s Fisher (non-FOMC voter) says he sees end of 30-yr bond-market rally while calling for reduction in QE
- Japan to target 2% annual growth through FY22, Nikkei says, to be discussed at tomorrow’s meeting of economic council
- Australian 1Q GDP grew 2.5% Y/y vs est. 2.7%; AUD weakened, odds of Aug. rate cut rose to 58% in OIS pricing vs 49% pre- GDP
- Brazil will scrap tax on foreign investment as it seeks to arrest decline in the real
- Treasuries gain; 10-yr yield -2bps to 2.13%
- Nikkei -3.8%
- MSCI Asia-Pacific -1.8%
- Euro Stoxx 600 -0.7%
- Oil higher, gold and silver reverse Asian gains
SocGen covers the macro highlights:
A rise in the correlation of EUR crosses with commodities and equities has been noted this week, and not only has it changed the dynamics somewhat it is giving participants something else to think about as we wait for today's US ADP employment and non-manufacturing PMIs and ISM. If the manufacturing PMIs are any guide, then firmer European data are likely to play out and will diminish the arguments for a very dovish ECB message tomorrow (to the extent that a reining back in was not planned already). Eonia rates have been edging higher ever so gradually from the May lows as we have moved into June, with Eonia for the December meeting having more than doubled to 0.08%. Stronger data today will keep up the tendency to pay up, even though no one is ready to totally discard the idea of further stimulus yet.
The inverse correlations for EUR/USD (and EUR/CAD, EUR/NOK, EUR/PLN) vs Eurostoxx are in contrast to the positive correlation of EUR/JPY with Eurostoxx, and this shows how the EUR is considered a risk-sensitive currency these days, whilst the JPY remains the favourite defensive play when risk aversion sets in. The influence of rate differentials has ebbed somewhat, especially for EUR/USD even as EU swaps try to narrow the gap with the US, but this is more relevant for crosses like EUR/JPY and EUR/GBP. Whilst we see evidence of stronger Q2 economic momentum in the UK, the fact that short-term rates in the eurozone and the UK are not going anywhere justifies the narrowest of ranges we have observed so far this month. If Draghi tomorrow puts his weight behind the article published in the FT yesterday (ECB backs away from using bazooka), then psychologically this will force markets to reel in the dovish bets on euro rates. It is in that context that the services PMI and retail sales will have to be assessed today. Unconfirmed ECB sources yesterday claimed that the central bank is divided on a further cut in the refi rate. Whether that means the ECB can steal the thunder from US data is extremely doubtful. ADP and ISM employment components will be dissected this afternoon for a final stab at Friday's payrolls guesstimate.
* * *
DB's Jim Reid recaps the balance of overnight events.
Fixed income asset classes continue to come under pressure across EM and DM, with fairly notable intra-day vol in some areas, as investors fret over the Fed’s potential path of asset purchases. Following yesterday’s moves, 10yr yields in USTs, bunds and gilts are +52bp, +37bp and +41bp off their recent lows respectively. Similarly, major DM credit indices have pulled back from the cyclical tights seen last month including US CDX IG (+13bp off the tights), European iTraxx (+17bp) and Australian iTraxx (+18bp). Interestingly US CDX IG traded between - 2bp and +5bp yesterday, a range wider than any seen for a few months. There is clearly nervousness around the Fed.
It remains to be seen whether the correction will continue, but for now the technical picture continues to generate headlines amid reports of outflows across a number of fixed income funds. Bloomberg reported yesterday that PIMCO’s Total Return Fund, which is the world’s largest mutual fund, had clients redeem $1.32bn last month. The article notes that the redemptions were the first since 2011, which although not insignificant remain fairly small in context of the fund’s $285bn size. In high yield, there have been recent reports of outflows from the SPDR Barclays High Yield and iShare/iBoxx High Yield Corporate bond funds (Bloomberg), which is adding further nervousness to the entire asset class. Indeed, it hasn’t just been fixed income which has been at the behest of the Fed's likely next move. Yesterday saw the S&P500 (-0.55%) oscillate between highs of +0.35% and lows of -1%, helped along by a number of Fed speakers. Fed Governor Sarah Raskin bemoaned the state of the labour market, saying that the unemployment rate underestimates the true scope of the unemployment problem, and also noting that those who do find employment often must accept low quality positions. Meanwhile, FOMC dissenter Esther George repeated her call to slowdown stimulus saying the risk of tightening too late was just as high as if the Fed tightened too soon.
Turning to Asia, equities are trading with a negative tone overnight, taking their lead from the cautious end to the US session yesterday. The Hang Seng (-0.8%) and KOSPI (-1%) are both trading in the red, in contrast to the better sentiment in Japanese equities. Prime Minister Abe outlined his economic growth strategy overnight. The measures announced include the establishment of special strategic zones for high density construction, and the opening up of energy, health and infrastructure sectors. The Nikkei and TOPIX indices initially traded up as Abe spoke but subsequently sold off as some were disappointed by the lack of detail around the plans. Dollar yen has seen volatile trade, and is currently 0.3% lower as we go to print (99.7).
Staying in Japan, the Nikkei reported that the BoJ’s balance of JGBs grew by more than JPY8trillion last month to JPY104trillion as of the end of May. Its balance sheet has surpassed the JPY100 trillion yen mark for the first time. According to the article, the central bank purchased 40-year JGBs for the first time (JPY45billion) last month, with its holdings of 10-year JGBs increasing the most. Interestingly, the Nikkei is also reporting that the BOJ's REIT purchases are bumping up against a ceiling.
Turning to the day ahead, the US ADP employment report and non-manufacturing ISM are the key data points ahead of Friday’s all-important payrolls. Consensus is for +165k private level change for the ADP report and forecasters are looking for a 53.5 ISM print. Factory orders, MBA mortgage applications and the Fed’s Beige book round out the US dataflow. In Europe, services PMIs and Q1 GDP for the Euroarea are scheduled.
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We cannot contain Godzilla. Evacuate Tokyo.
Everyone put on their bullet proof vests.
Let's be safe out there......and good luck.
Talk about high wiring on the fence all the time, just hope he don't fall.
Godzilla was the Geico lizard LC55!
godzira
defration...
Big question is will this ever happen in US? Or well trained BTFD gunea pigs will always be rewarded for stupid following of mantra... Stupid are rewarded in this "market" or wait, are actualy smart new stupid? or VV...
Chair Satan has changed everything not only capital misallocation but brain misalocation in some, consciencemisalocation in ever pumping analysts appearing on various media outlets...
Kuroda should have learned from Greenspan's actions that inflating bubbles is not sound policy.
They've been fighting the "deflation beast" for nearly 30 years now, and have yet to really wound it. The laughable part is the US is charging into the battle with the same weapons and tactics that have failed the Japanese.
That and the failed policies of marxism from Euroland and the not so former USSR.....coupled with our brains in the west assures us a great victory for the collective my comrades.
"They stab it with their steely knives, but they just can't slay the beast"
: "sent the USDJPY plummeting well below the 100 support line, printing 99.55 at last check."
Is this what Ron Paul meant by "competing currencies"?
Very bullish
Gentleman, you can't fight in here. This is the war room!
https://www.youtube.com/watch?v=yAz9z4T54tE
We need a better nic for Abe.
Bankster's Bitch?
"Tosser"?
Abe - Big Kahuna
Kuroda - The Gekko
Japanke? Japan + Bernanke
Hmmm. This strikes me as the end game. Increasing the monetary base and guaranteeing 3% wage growth says to me the government checks are going higher. Basically Japan is one giant post office "with some special opportunity zones" to smooth things out. I don't see ANY buyers of JGB's here...let alone "marginal one's." hmmmm. How do you hedge that risk?
Just a Fib retrace...more fun in the fall
<< odds of [Australian CB] Aug. rate cut rose to 58% in OIS pricing vs 49% pre- GDP >>
It's just the beginning of rate cuts there 'Down Under' as their house prices (and sales) sink...and unemployment rises as China's demand slows.
Abecomic: 'My' pran is wolking velly werr...and as intended.
All of our key data points pre-Friday will be glorious! Even if they're shitty, it will be a sign that we are winning. So says Maria B.
Darn that pesky bond market. It's managed to turn Abe's inflationary policies back to deflationary policies in two trading sessions. Now all that's left is a special election and the Nikkei will be back under 10,000.
Meanwhile back at the ranch.... 60% of Americans feel US is headed in the "wrong direction" and 47% think Obama is lying about his knowledge of IRS scandal.. Boomberg Reports
As long as the "Market" is headed in the "right direction" maybe nobody will notice. Inhale to the Chief.
It astounds me that number is only 47%. Duh what was I thinking 51% of the country is on the free shit brigade they don't care what he does or doesn't know.
when 90+ % of boomberg readers/listeners/watchers are libtards thats and impressive number....
/es has that eerie collapsing downward parabolic look to it if you visualize an arc traced along the intra-day highs. Smells like collapse begins today down to the low 1500's.. watch gold if it start spiking the PPT is in preventing that stock flush.
It is getting funny watching them trying to cap gold. It is like a jet loaded into an aircraft carrier catapult with full afterburners going. It amuses me.
Maybe the "dollar as reserve currency" group are submarining the Japanese effort
Currency manipulation
In 1938 th US stopped selling scrap metal and oil to Japan in an effort to keep Japan from industrializing
I bet Japan swings to China
And the Yuan
3 years later they sent it back in bombs.
Roughly 3000 points down from just a few short weeks ago. To quote Monte Python, "Its Just A Flesh Wound..."
still up huge over 6 months. Call me when its down 20% from 1/1/13.....
I expect a call by the end of the month....
I think it was around 10,500 on 1-1, so I guess I'll be calling on the 22nd
And to quote Mister Bill:
OH NOOO
O
O
O
O
O
All that money pumped in and already gone. Cue the South Park clip. The good news is there is good support for the Nikkei around 9500. Looks like not only did that third arrow miss the bulls eye but it completely missed the target.
<rant>Because ZH is more sophisticated than say, CNBC, you really shouldnt even use the whole "bear market means -20%" thing. It is just nauseating when I hear that. A bear market means a series of lower highs and lower lows across multiple resolutions of time. It is emphatically not a simple point of reaching 20% down from a high.</rant>
A 19.999% drop IS NOT a bear market! But a 20.001% drop IS!
Buy the fucking crater!