Japan goes to bed with another absolutely ridiculously volatile session in the books following a 5%, or 637 point move higher in the PenNIKKEIstock Market closing at over 13514, which if taking the futures action going heading to Sunday night into account was nearly 1000 points. With volatility like this who needs a central bank with price stability as its primary mandate. The driver, as usual, was the USDJPY, which moved several hundred pips on delayed reaction from Friday's NFP data as well as on a variety of upward historical revisions to Japanece economic data, but not the trade deficit, which came at the third highest and which continues to elude Abenomics. Fear not: one day soon consumers will just say no to Samsung TVs and buy Sony, or so the thinking goes. erhaps the most interesting news out of Asia was the spreading of FX vol tremors to a new participant India, which is the latest entrant into the currency wars, even if involuntarily, where the Rupee plunged to 58, the lowest ever against the dollar.
With JPY back around 98 and the Nikkei 225 indicating further advances, perhaps the fears in the market are mis-represented - at least that's what the other Goldman desk would have you believe. But, as The Japan Times reports, even glorious leader Abe's own LDP party are beginning to voice concerns that all this fluff is - well - just that. As we outlined here the market is already concerned, and additionally as Goldman notes, the fact that the JGBi expected inflation level - a now symbolic indicator of policy success since Kuroda quoted it - is now suddenly moving counter to its previous extended trend could possibly indicate the markets’ early signal questioning the credibility of the BOJ policy. The recent stock price collapse, Lower House LDP lawmakers noted "shows the market expects little (of Abenomics)." The sky-high approval ratings (and business confidence) for the Abe Cabinet have been bolstered by the resurgence of the benchmark Nikkei since 'Abe(g)nomics began. The stock market’s downturn, therefore, has created a sense of crisis among some members of the ruling LDP, because "Abenomics could fail."
Whenever Juncker is lying, or Goldman openly commands the muppets to buy, you know the situation is serious, and Goldman has a lot of unwinding to do. Which is precisely what just happened following the Squid's reco to buy Nikkei September futures (NKU3) ahead of the BOJ meeting. What is Goldman's thesis in a nutshell: hope may be fading in Abenomics, but the "incentives for Governor Kuroda to use the [upcoming BOJ] meeting to signal a firmer and clearer commitment to the easing course, and to highlight the potential to do more, are high and rising." In other words, please bet the farm on more of the same jawboning that lead to a 20% loss for anyone who bought as recently as 2 weeks ago. Oh, and by the way, complete the sentence, whenever a client is buying from a Goldman flow trader, the Goldman flow trader is [____].
"I realised that I was part of something that was doing far more harm than good... The NSA routinely lies in response to Congressional inquiries about scope of surveillance in America. The NSA is intent on making every conversation and every form of behaviour in the world known to them.... What they're doing" poses "an existential threat to democracy."
- Edward Snowden, 29, PRISM Whistleblower
A dispassionate review of a slew of Chinese economic data. Why the capital inflows are not a result of Qe as much as Chinese investors gaming their own system. Why the lower inflation is not evidence of Japan exporting deflation, as some have claimed. Why the decline in imports may be related to prices and foreign demand, more than Chinese demand itself.
As we got closer to June 11/12, the date when the German Constitutional Court will conduct a public hearing on the various challenges to the ESM and OMT, the ECB would have no choice but to disclose more details about the real terms of the OMT to assure smooth passage of the OMT, and not to jeopardize the tenuous balance in Europe where things are once again going bump in the night with bond yields suddenly blowing wider on fears the Japanese bond carry trade is set to unwind... The first such notable detail comes courtesy of the FAZ this morning, which "in fear of the judgment of the Federal Constitutional Court, the European Central Bank (ECB) has revealed for the first time the boundaries of their controversial bond buying program... ECB President Mario Draghi announced last year, if necessary, that unlimited government bonds of distressed euro countries would be monetized to save the euro. Meanwhile, however, the central bank has limited this program to a maximum volume of €524 billion and also communicated this to the court." This is the maximum allowable purchases of Spanish, Italian, Irish and Portuguese bonds.
As we noted just two weeks ago - before the hope-and-change-driven exuberance in Japanese equities came crashing down - "those who believe in Abenomics are suffering from amnesia," and Nomura's Richard Koo clarifies just who is responsible for the exuberance and why things are about to shift dramatically. Reasons cited for the equity selloff include Fed Chairman Ben Bernanke’s remarks about ending QE and a weaker than expected (preliminary) Chinese PMI reading, but, simply put, Koo notes, more fundamental factor was also involved: stocks had risen far above the level justified by improvements in the real economy. It was overseas investors (particularly US hedge funds) that responded to Abe's comments late last year by closing out their positions in the euro (having been unable to profit from the Euro's collapse) and redeploying those funds in Japan, where they drove the yen lower and pushed stocks higher. Koo suspects that only a handful of the overseas investors who led this shift from the euro into the yen understood there was no reason why quantitative easing should work when private demand for funds was negligible... The recent upheaval in the JGB market signals an end to the virtuous cycle that pushed stock prices steadily higher.
We’ll admit it. We just don’t understand Prime Minister Shinzo Abe’s much vaunted economic policy known as Abenomics. Spend public funds that Japan doesn’t have, increase inflation, but not raise minimum wages? How is this supposed to improve the economy? We know we’re missing something. Secretly, we feel like it only works because people believe it works. Sort of like fairies. If you believe in fairies, gnomes, and Abegnomics – than clap your hands! Follow the rainbow, kids! A pot of platinum yen coins is waiting for you.
Looks like the sun has gone behind the clouds in China for a bit! Not only are the solar panels creating friction between China and the EU, but now it turns out that last month saw Chinese export growth unexpectedly decrease.
China continues to be stuck between an external hot money flows rock and a contracting economy and unstable banking sector hard place... Thanks to the G-0 central planners, the PBOC's hands are now tied: if it injects more hot money or lowers the interest rate the inflation on the margins, which it has so far been able to mask will spill over into the streets in a repeat of 2011, and force an even more epic scramble for inflation protection than the one seen two years ago, and which led to gold rising to just shy of $2000. Naturally, at a time when the central planners have gone all in on precipitating the Great Rotation out of bonds and into stocks at all costs, a re-exodus into gold might just end the Keynesian experiment. So the China central bank has that to contend with as well.Which means one thing: in reality Chinese credit and liquidity is in far worse shape than reported. And sure enough, over the past 24 hours we got news courtesy of Bloomberg that the "China Liquidity Squeeze Risks Companies’ Debt Rollover" leading to what may be the first harbinger of a Chinese bank failure which may subsequently lead to a whole lot of dominoes falling.
The last couple of weeks have been very interesting. Remember that, certain regional differences aside, Japan has, for the past two-plus decades, been the global trendsetter in terms of macroeconomic deterioration and monetary policy. The West has been following Japan each step on the way – usually with a lag of about ten years or so, although it seems to be catching up of late. Now Japan is the first developed nation to go ‘all-in’, to implement a no-holds-barred money-printing regime to (supposedly) ‘stimulate’ the economy. We expect the West to follow soon. In fact, the UK is my prime candidate. Wait for Mr. Carney to start his new job and embrace ‘monetary activism’. Carnenomics anybody? But here is what is so interesting about recent events in Japan. At first, markets did exactly what the central bankers wanted them to do. They went up. But in May things took a remarkable and abrupt turn for the worse. In just eight trading days the Nikkei stock market index collapsed by 15%. And, importantly, all of this started with bonds selling off. Are markets beginning to realize that all these bubbles have to pop sometime and that sometime may as well be now? Are markets beginning to refuse to dance to the tune of the central bankers and their printing presses? Are central bankers losing control?
The Fed’s zero lower bound policies have dislodged credit risk as the primary concern for investors, only to replace it with a major technical headache: interest rate risk. If rates remain too low for too long, financial stability suffers as investors reach for yield, companies lever up, and lending standards decline. The greatest of financial stability risks is probably the least discussed among those that matter at the Fed: the deterioration in trading volumes. As such, we suspect that the longer low rates persist, the worse the unwind of QE may be. And it may, in fact, already be too late. As events in the past two weeks have shown, credit markets also appear vulnerable to a rise in rates that occurs too quickly or in a chaotic fashion. Moreover, to the extent that issuers sense demand may be waning for bonds, there’s a distinct possibility the pace of supply increases precisely at the same time that demand decreases. Invariably, it’s this sort of dynamic that ends in tears.
There are many headwinds to deflation-monster-fighting Abe's plans to bring Japan back from the ledge but perhaps the biggest one is the demographic disaster. As Japan News reports, the decline in Japan's population set another record in 2012 with the number of deaths exceeding births for the sixth year in a row. Records were broken everywhere. The number of babies born in the nation in 2012 fell by 13,705 from the previous year to hit a new low of 1,037,101 and while a total fertility rate of 2.0 children per woman will maintain the population at a stable level. Japan’s rate has continued to fall since dropping below 2.0 in 1975. Meanwhile, the number of deaths in 2012 hit a record high of 1,256,254, increasing by 3,188 from the previous year. The greying of Japan continues and worse still, the young, for many reasons, are not having children as the number of women in their 20s who had a child in 2012 decreased by 16,200. Will the fourth arrow of Abenomics be a state-sponsored unprotected sex-a-thon?
Succinctly summarizing the positive and negative news, data, and market events of the week...