Update: rumor of Price Keeping Operation in Japan. If correct, this means that the BOJ's $70 billion per month injection is no longer sufficient, that the BOJ's credibility is being actively questioned - by far the biggest stigma for any central bank anywhere - and pass-through financial entities have to artificially prop up the market by buying ETFs in order to preserve the galloping rate of increase or else face a collapse such as that seen in the past several days.
The "catalysts" in the new normal have become so hilarious that losing money in the centrally-planned market can be simply viewed as the price of admission to witness the most entertaining circus spectacle in capital "markets" history. Behold: the 8pm open of Japanese trading. Apparently, somehow, the fact that a market has reopened is not only news, but is massively sell the Yen news, at least by Mrs. Watanabe, and since every US algo is correlated to the USDJPY, this means a surge in the E-mini. But perhaps what those sneaky algos are discounting is that tomorrow is a Tuesday. And as every dart chasing monkey with an E-trade terminal knows: nobody ever loses money on Tuesdays betting on the Stalingrad & Propaganda 500 index any more.
Many are still wondering who (or what) stole the jam from the Japanese stock market's doughnut just three short days ago. Some blame an out-of-control bond market; others fear members of the BoJ recognizing they have blown the bubble too big too soon; still more fear the jawboning on JPY devaluation that has seemingly about-faced recently. The reality is - none of these were surprises or new to the marketplace. But in this world of free-flowing totally fungible central bank liquidity, we suspect the following chart is the real answer. Simply put, the S&P 500's bubble just couldn't keep pace with the Nikkei 225's and with USDJPY unable to support the relative price appreciation difference - the six-sigma richness of Japan to the US was just too much. Two-and-a-half months of 'outperformance' undone in 3 days leaves the question - is it over?
Just like last year, when it was the turn of Europe-focused crushed and battered hedge funds to generate outsized returns due to some brief ECB-inspired euphoria, if only for a brief period, and then promptly fall back into obscurity, so now it is the time of the "Japan" strat. As the latest HSBC hedge fund performance report confirms, the best YTD returns are, as expected, those for Japan-focused funds. So how are the legacy titans of the hedge fund world doing? The answer is in the table below: of the vast majority of hedge funds, only a handful are outperforming the market year to date. This is becoming a major concern for an industry that has underperformed the S&P for the fifth year in a row, and which has to fight tooth and nail to justify its exorbitant fees in a world in which there is noneed to hedge any risk any more: after all, Ben Bernanke has everyone covered. One fund that has nothing to worry about is Dan Loeb's Third Point as it continues its juggernaut of crushing both returns and competition without pause.
While Japanese stocks plummet further during the admittedly thin European day session extending their losses from the Japan day-session, it seems the cats have been herded to the next high beta junk market - European sovereign bonds. Spanish and Italian bonds rallied 12bps today for their best day in over a month! European stock markets also benefited from Mrs. Watanabe's scramble ending the day up around 1% (Italy +1.4% despite Grillo's comments on the inevitability of a debt restructuring). Amid all this euphoria, European corporate and financial credit markets were not playing along at all. US equity futures got a helping hand from a ridiculous shunt in AUDJPY and CADJPY (FX carry) which lifted S&P futures 10 points off overnight lows. Treasury futures drifted tick-for-tick lower with S&P futures gains (implying around 3-4bps rise in yields). Obviously volumes were light and markets were thin. The USD is ending unchanged as JPY corrects lower and AUD higher but Gold and Silver are up 0.5% and 1.2% respectively.
"It's highly debatable whether AAPL iCloud is making the inroads that they predicted..."
As if the overnight session in Japan was not bad enough, futures markets are indicating yet more weakness from the market that seemed (until 3 days ago) incapable of falling. With a 14.3% drop from its May 22nd highs, Japan's Nikkei 225 is struggling to find buyers for this dip. What is interesting is the bid for European peripheral debt and equity markets this morning and the bounce in US futures (with no commensurate move in JPY which is hovering around 101). Gold and Silver are up around 1% with the USD unchanged. Treasury Futures imply a rise of 1-2bps in yield.
UPDATE 1: S&P 500 futures now red (-5.5 points from open); TOPIX -3%, Japanese banks and real estate leading the slide (-16% from highs).
UPDATE 2: JPY has broken back under 101.00
It seems the sell-the-f$$king-bounce crowd are back in Japan once again. Minutes from the last BoJ meeting are providing some ammo for the fall as doubts appear among the members of the committee...
*ONE BOJ MEMBER: DOWNSIDE RISKS FOR PRICES ARE LARGER
*A FEW MEMBERS: SEEMS HARD TO REACH 2% IN LATTER HALF OF PERIOD; KEEP MULLING STEPS TO AVOID DECLINING LIQUIDITY
For now, JPY has strengthened notably from its gap-weaker open and is trading around unchanged from Friday's close. JGBs opened modestly stronger. But it is the equity market that is fading fast with TOPIX now down 28 points (2.5%) from Friday's close - pressuring the lows once again (and the 10% correction) as the realization that 'Abe can't have his equity euphoria and eat his low interest rate cake too' increases...
Until the last few days, the attention of the mainstream business media has been on how 'wonderful' Japan's policy prescription must be since its stock market is soaring at a record pace. The reality is that the far bigger JGB market has been crumbling. As we explained here, this is a major problem for the bubble-blowers, as the extreme volatility (VaR shock) that the Japanese Government Bond market has been through in the last few weeks has some very large and painful consequences, that as yet, have not been discussed widely. The term 'shadow banking' has been one ZH readers are by now extremely familiar with as we have discussed this as the panacea of unseen leverage (most recently in Europe and China) for years; the funding markets in Japan, so heavily reliant on JGB repo for short-term liquidity and the efficient functioning of two-way markets in the bonds, are hitting a wall. As JPMorgan notes, the number of JGB 'fails' - where a repo deal breaks down - has more than doubled in the last week. For a market that represents 40% of the total Japanese money-market, this will be a critical area to watch for a JGB waterfall.
Just when you thought the R&R debate was finished, it seems Paul Krugman's latest "spectacularly uncivil behavior" pushed Reinhart and Rogoff too far. In what can only be described as the most eruditely worded of "fuck you"s, the pair go on the offensive at Krugman's ongoing tete-a-tete. "You have attacked us in very personal terms, virtually non-stop... Your characterization of our work and of our policy impact is selective and shallow. It is deeply misleading about where we stand on the issues. And we would respectfully submit, your logic and evidence on the policy substance is not nearly as compelling as you imply... That you disagree with our interpretation of the results is your prerogative. Your thoroughly ignoring the subsequent literature... is troubling. Perhaps, acknowledging the updated literature on drawbacks to high debt-would inconveniently undermine your attempt to make us a scapegoat for austerity."
A week later and everyone is a bit more nervous, with the speculation that US sovereign debt purchases by the Federal Reserve will wind down and with the Bank of Japan completely cornered. In anticipation to the debate on the Fed’s bond purchase tapering, on April 28th (see here) we wrote why the Federal Reserve cannot exit Quantitative Easing: Any tightening must be preceded by a change in policy that addresses fiscal deficits. It has absolutely nothing to do with unemployment or activity levels. Furthermore, it will require international coordination. This is also not possible. In light of this, we are now beginning to see research that incorporates the problem of future higher inflation to the valuation of different asset classes. Why is this relevant? The gap between current valuations in the capital markets (both debt and credit) and the weak activity data releases could mistakenly be interpreted as a reflection of the collective expectation of an imminent recovery. The question therefore is: Can inflation bring a recovery? Can inflation positively affect valuations? The answer, as explained below, is that the inflationary policies carried out globally today, if successful will have a considerably negative impact on economic growth.
However, the best argument why the type of Quantitative Easing imposed by Ben Bernanke, and the associated "necessary and sufficient" condition to exit this greatest of all monetary experiments, or eventually allow Ben and Kuroda to taper QE, i.e., the "great rotation" from government bonds into stocks (because otherwise both the Fed and the BOJ will be stuck monetizing and monetizing and monetizing until one day, soon, they own all government bonds), will never work in Japan is a simple one. And quite visual...
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.
The biggest fear of the Federal Reserve has been the deflationary pressures that have continued to depress the domestic economy. Despite the trillions of dollars of interventions by the Federal Reserve the only real accomplishment has been keeping the economy from slipping back into an outright recession. However, when looking at many of the economic and confidence indicators, there are many that are still at levels normally associated with previous recessionary lows. Despite many claims to the contrary the global economy is far from healed which explains the need for ongoing global central bank interventions. However, even these interventions seem to be having a diminished rate of return in spurring real economic activity despite the inflation of asset prices. The risk, as discussed recently with relation to Japan, is that the Fed is now caught within a "liquidity trap." The Fed cannot effectively withdraw from monetary interventions and raise interest rates to more productive levels without pushing the economy back into a recession. The overriding deflationary drag on the economy is forcing the Federal Reserve to remain ultra-accommodative to support the current level of economic activity. What is interesting is that mainstream economists and analysts keep predicting stronger levels of economic growth while all economic indications are indicating just the opposite.
It is not just the massive short positioning in Gold futures that has BofAML's commodity strategists concerned; but the regime changes in the precious metal's volatility structures suggests risks are significantly mispriced relative to equities, rates, and other commodities. Following the most abrupt price collapse in 30 years, near-dated implied volatility in gold spiked dramatically in the past month. The term structure of implied gold volatility has also changed shape and the market now shows a marked put skew. Even then, the spike in precious metals volatility had remained a rather isolated event until this week’s sharp drop in Japanese equities. As the following chartapalooza demonstrates, while large-scale QE has tempered volatility across all asset classes for months, we remain concerned about the recent sharp price movements in gold or Japanese equities, and see a risk that other bubbling asset classes may follow.