First, the important news: in a few hours the Fed will inject between $1.25-$1.75 billion into the stock market. More importantly, it is a Tuesday, which means that in order to not disturb a very technical pattern that will have held for 20 out of 20 Tuesdays in a row, the Dow Jones will close higher. Judging by the futures, this has been telegraphed far and wide: it is a Ben Bernanke risk-managed market, and everyone is a momentum monkey in it.
In less relevant news, the underlying catalyst for the overnight rip higher in risk was the surge in the USDJPY, which left the gate at precisely Japan open time, and after languishing at the round number 101 support for several days, did not look back facilitated by what rumors said was a direct BOJ intervention via a Price Keeping Operation in which banks bought ETFs directly. This was catalyzed by the usual barrage of BOJ and FinMin individuals engaging in post-crash damage control and chattering from the usual script, this time adding the following pearl:
- MIYAO: BOJ EASING TO PUT DOWNWARD PRESSURE ON YIELDS
... And the MOF's pronouncement that Japan would sell 5 and 10 year bonds direct to individuals each month.
In other words, the 2% inflation is coming so buy stocks and hedge by... buying bonds and duration risk. And fear not, because while the stock market should rise on expectations of inflation, please don't sell your JGBs, which just happen to be nearly four time more in notional than stocks [40], because the central bank promises it will keep yields low. Just look in the US. Oh, but ignore that the USD is the world's reserve currency (for now), and that US Paper is what is considered High Quality Collateral for a severely collateral deficient shadow banking system, while JGBs are merely ticking timebombs on Japanese bank balance sheets.
Those sick of Japan will have a tough time this week, as there is much more on deck from the island country: it will remain in the spotlight with Kuroda speaking tomorrow at a BoJ Conference in Tokyo, on the same day that the BoJ has scheduled a meeting with JGB-market participants to discuss the recent rise in bond yields. According to a BoJ official, the central bank will be using this meeting to help it decide its schedule for JGB purchases starting from June. This Friday’s Japanese data releases including household spending, employment, inflation and industrial production will be important in order to justify the mood that the economy is improving when in reality it is merely leading to soaring import prices and broader deflation.
All that said, it is truly spectacular to follow the Japanese script, which is obviously dictated by the Fed, to see what the Fed thinks is a successful strategy and has been accomplished over four+ years, and what it is trying to get Japan to complete in a few months.
As Weidmann said, "good luck with the experiment" indeed. And certainly ignore the statement overnight from Lewis Sanders, who resigned as chief executive officer of Alliance-Bernstein Holding LP in 2008, who was speaking in Sydney at conference. and who simply said that QE in Japan will fail.
Overnight, macro news was largely missing, but when it comes to "news", fundamental developments are the most meaningless of all, and either way, are always positive. The Taiwanese government unveiled a number of measures to boost domestic demand, among which a rerun of that spectacular US failure, "cash for clunkers." However, this move had been well signaled and priced in, and the TAIEX was largely flat following the announcement.
Here is what little news was bulletin worthy, via Bloomberg:
- Treasuries fell before supply and as stock markets in Asia and Europe gained for first time in five days; USD strengthened vs JPY; Treasury sells $35b in 2Y notes today, WI yield 0.255%.
- Abe adviser Koichi Hamada says BoJ can add to already unprecedented stimulus if necessary to drive an economic revival
- BoJ policy board member Miyao said central bank has taken all the necessary easing steps for now; better economic outlook may drive up yields
- Auction of 1.2t JPY 20Y JGBs saw weakest demand in 9 mos., with bid-to-cover of 2.54 vs 3.68 at previous sale; high yield 1.6940%
- Chinese Premier Li said China is targeting 7% growth this decade, faces huge challenges
- Employment at the U.K.’s four biggest banks set to fall to 9-yr low by end-year as banks eliminate about 189,000 jobs amid a dearth of revenue
- ECB’s Noyer said no major central bank has tried negative rates; such rates have had varying results in smaller countries
- Europe finds itself in a similar position to Japan as the continent faces a “lost decade,” said Pacific Investment Management Co., which manages the world’s biggest fixed-income fund
- China is studying the possibility of investing a portion of its $3.4t FX reserves in U.S. real estate, said two people with direct knowledge of the situation
- Sovereign yields mixed, core yields higher, 10Y JGBs at 0.896%, +7.6bps, peripheral European yields lower. Asian, European stocks higher; U.S. stock index futures higher. WTI crude, metals higher; gold lower
To summarize, it's a central bank world indeed with central banks in the Central European Union having cut interest rates to record lows in recent months and a further adjustment is possible. Central banks in Hungary (MNB) and Poland (NBP) may still cut key interest rates. MNB may today cut by 25bp to 4.50% while next week NBP may cut its key rate by 25bp to 2.75%. The Czech central bank's key interest rate is close to zero, so its next policy tool could be FX intervention.
And since nothing but asset bubbles remains, the FT reminds readers that the proportion of “covenant-lite” loans has soared to more than 50% of all leveraged loan issuance so far this year, twice the level seen during the last boom in 2007. So far this year, $129bn of leveraged loans have been sold with covenant-lite features, up from $22bn in the same period last year, and $96bn for the whole of 2007 according to S&P Capital IQ data. On a related note, Bloomberg reported that an ever increasing number of companies are tapping the loan market to pay dividends.
And just to make sure that the market closes well green today, the only actual "data" will be yet another reading of consumer "confidence" this time from the Conference Board. Expect this to surge on news that it is Tuesday and stocks have nowhere to go but up, which in turn will send stocks, where else but, up.
Some additional color on today's macro catalysts out of SocGen:
Activity should pick up today as the UK and US markets open again following the holiday, but a decent bounce back in the Nikkei despite volatile JGBs is giving European markets the thumbs up for a positive risk on start. The move in US rates commands close attention after 10y swaps returned over 2.20% for the first time since April last year. A break of 2.25% would clear the path for a return to 2.42% and inevitably this level will have bears talking of 2.50%. All the more reason to concentrate on US consumer confidence today (SG forecast 74.0 vs consensus 71.0) and upcoming UST supply.
Indeed, US conditions will be more of a deciding factor today and in the coming two weeks as markets remain nervous on the timing of a change in Fed policy. Managing expectations about the pace of QE is a topic that the WSJ's Hilsenrath comments on this morning and is something that could cause volatility in rates to command a premium in the foreseeable future. US long-term interest rates are currently driving the USD complex including EUR/USD but the correlation across fixed income assets has also consequences for EUR rates. Notwithstanding the clouded macro outlook in the eurozone, 10y swaps are backing up and now approach the key 1.71%-1.75% area. Thus, we will be watching the 10Y UST yield today with short positions set to be squeezed by strong confidence data. A move through 2.06-2.09% area would see buyers of USD dips return and could see a test of the post-Bernanke/FOMC minutes high for the dollar index (84.498).
In the UK, gilts also have been driven by US bond markets recently. More of the same is expected this week as no major indicators are scheduled to be announced. MPC's Haldane and Tucker are scheduled to speak today. As for GBP/USD, it has been on the defensive for four weeks in succession, the longest stretch since February. For the time being, sterling is likely to struggle vs its main counterparts as the market awaits the arrival of the new BoE governor Carney at the beginning of July.
DB's Jim Reid completes the overnight recap:
Ahead of us this week in Europe, the European Commission announces economic policy recommendations for EU members on Wednesday. Recent reports suggest that the Commission may shift its emphasis from one of fiscal consolidation to structural reforms. The Commission has indicated that it may give France and Spain two extra years to bring their budget deficits below the EU ceiling of 3% of GDP, while other countries such as Italy and Portugal are reportedly expected to get additional time to meet deficit targets (Reuters). In terms of the week’s dataflow, credit and money aggregates for the Euroarea is scheduled for Wednesday, followed on Thursday by the European Commission’s economic sentiment survey. Inflation and unemployment data for the Euroarea are due on Friday.
After a slow start to the week, the data flow picks up in the US on Thursday when the latest Q1 GDP revisions and jobless claims are due. The week’s data calendar will conclude with Friday’s Chicago PMI, PCE inflation, consumer income and spending data.
Turning to markets, one of the key themes overnight has been USD strength which has seen the dollar index up 0.2%. Dollar strength is also evident in the major crosses including AUDUSD (-0.1%), USDJPY (+0.9%) and EURUSD (--0.1%). Elsewhere the weaker yen is helping the Nikkei (+1.1%) reverse some of Monday’s losses when it finished down 3.2%. The recent Nikkei weakness prompted Japan’s economy minister Amari to reassure the market today that stocks are in an “adjustment phase after recent sharp gains”. In the JGB market, 10yr yields are up another 5bp in Asian trading (0.88% as we type) after a lacklustre 20yr JGB auction. The move comes after weekend comments from Kuroda who warned of the risks from a rise in bond yields if not accompanied by
an improvement in the underlying economy.
Outside of Japan, Asian equities are trading mostly higher helped by the positive lead-in from the Stoxx600 which closed near the day’s highs of +0.33% yesterday. Gains on Asian bourses are being led by the Hang Seng (+0.1%), KOSPI (+0.4%) and ASX200 (+0.4%). Asian credit markets are unchanged to slightly tighter overnight, in line with the performance of Asian equities.
Turning to the day ahead, the main data releases are the Conference Board’s consumer confidence numbers in US and the latest activity readings from the
Dallas and Richmond Fed.