Everything was going so well in the overnight session, following some mixed Japanese data (stronger than expected production, inline inflation, weaker household spending) which kept the USDJPY 101 tractor beam engaged, and the market stable, until just before 2 am Eastern, when Tokyo professor Takatoshi Ito, formerly a deputy at the finance ministry to the BOJ's Kuroda, said overvaluation of the yen versus the dollar has been corrected, which led to a very unpleasant moment of gravity for the currency pair which somehow drives risk around the world based on what several millions Japanese housewives do in unison. The result was a slide to just 30 pips away from the key 100 support level, below which all hell breaks loose, Abenomics starts being unwound, hedge funds - short the yen and long the Nikkei - have no choice but to unwind once profitable positions, the wealth effect craters, and streams are generally crossed.
Jim Rogers was recently interviewed by GoldMoney and had plenty to say (as usual):
On Bernanke: "He doesn’t want to be around for the consequences of what he’s doing."
On Fiat: "Paper money doesn’t have a very glorious history, but again, nothing imposed by the government has a very long and glorious history."
On Europe's Crisis: "You can postpone it all you want, but the problems just mount."
On Capitalism: "You are not supposed to take money away from the competent people and give it to the incompetent so that the incompetent can compete with the competent people with their own money. That’s not the way capitalism is supposed to work."
In his recent presentation, Grant Williams picked out several mathematical equations that simply don't work: equities vs. fundamentals, the gold price vs. the price of gold, Chinese economic activity vs. the Chinese GDP number, and France vs. well ... logic. In his latest 'Things That Make You Go Hhmm' extravaganza, he extends this series of 'Bizarro' situations to Japan, US Housing, high-yield credit, the outlandish effects that comments by central bank policy makers have on markets, and the curious disconnect between insider trades and the broader market among others. There are countless more of these disconnects (the strength of the euro vs. EU economic data being a key one), which lead to a fundamental conclusion that is hard to deny: Sdnob, seitiuqe, setar tseretni, and seicnerruc will all eventually leave Bizarro World and come crashing back down to Earth (where they are known as bonds, equities, interest rates, and currencies); and when they do, they will likely do the opposite of what they're doing right now.
JPY is clinging sheepishly to the 101 level versus the USD almost as if there is an 'agreement'. It has been testing this level for a week now with many viewing the 100 line in the sand as a pass/fail mark for Abenomics. Tonight's heavy data flow is mixed. While we noted yesterday the inconsistencies in Abenomics, there are two interesting anecdotes this evening worth paying attention to. First, Household spending missed expectations by the largest amount in 18 months (not a good sign for real growth coming back); and second, in a brief moment on CNBC this afternoon, the CEO of Japan's mega corp Sony admitted that while, "the preconception is that a weaker Yen is good overall. Unfortunately for us, versus the USD, it goes the other way." Futures markets signal a green open (just like last night) for the equity markets and a slight red open for JGBs.
Both VIX and credit markets decoupled to the downside soon after Europe closed as equities clambered higher amid lower and lower volumes. As we headed into the last hour though both markets snapped higher to catch up to stocks and that mini-capitulation seemed enough for the equity rally to run out of steam. With the JPY strengthening all day, equities ignored the message of the carry traders until the close - when a big sell-side imbalance (and reality) smacked stocks lower to catch down to the all-important VWAP level once again. The USD saw its worst two-days since Oct 2011 giving up 3 weeks of gains. Gold and Silver are up nicely on the week (1.6 to 2%), outperforming today. Equities still managed gains on the day (despite the late-day tumble) and (oddly) Treasuries also ended very marginally in the green. The last few minutes of the day - normally kept open for some levitating algo to save the day - was a cliff-dive as news of FX margin controls on the all-important JPY carry driver smashed all risk-assets lower.
Moments ago the 101 USDJPY tractor beam was broken, sending the pair lower, as a red headline hit the tape saying that...
- JAPAN TO IMPOSE NEW RULES ON FOREX MARGIN TRADING, NIKKEI SAYS
Which incidentally was long overdue: with the BOJ scrambling to contain bond (and stock, if only to the downside) volatility, it was always the FX market that was the primary uber-levered culprit moving both asset classes. As such, it was very surprising that in a world in which all correlated asset classes (just look at the USDJPY-ES relationship) are driven by FX, that currency leverage and margin rules have remained largely untouched by regulators and central bankers whose credibility is suddenly slipping away, alongside the surge in global market volatility in the past week.
You have your fear, which might become reality; and you have Market Godzilla, which IS reality...
With both the Real Estate and Banking equity indices in Japan already in bear markets (down over 20% from recent highs) and the broad indices down over 15%, just how much pain can the massive influx of foreign capital take before the exodus really takes hold. Today's 'news' of the GPIF's allocation shift won't be enough to stem the tide as 'foreigners' (who have flooded on an epic scale into Japanese stocks) step away to the next hot-money focus... this won't end well.
"Since we're dealing with markets that are being manipulated by central bank policies, there is no such thing as economic analysis anymore. All you have is the imaginations of central bankers, and you don't know what they're going to do, so you have to be diversified."
At the height of the financial crisis (i.e. 2008) it was easy to despise just the bankers for their serial and colossal ineptitude and rank hypocrisy. Now, five years into one of history’s most alarming bubbles, it’s easy to despise just about everyone in a position of financial or political authority, and for the same reasons. The real black comedy lies in the manipulation of market prices that is now endemic throughout the global financial system. As Japan is now showing, even with the unrestrained commitment of a central bank and its magical powers to create money out of nothing, there are practical limits to market rigging activity. Last week’s price action within the Japanese government bond market and stock market suggests that both of these markets are in the early stages of shaking themselves to pieces. The fallout of unintended (counter-intended ?) consequences from massive market manipulation will be awesome.
Traders and speculators are watching the $1,413/oz resistance level. A daily close above this level will likely trigger the beginnings of a short squeeze. Holdings in the largest bullion-backed exchange-traded product expanded yesterday for the first time since May 9. Strong premiums for gold bars in Asia show that jewellers and investors are busy buying bullion on this dip. In Singapore, Reuters reports that “supply constraints” have sent premiums to “all time highs” at $7 to spot London prices. Animal spirits are returning to the gold market in the ‘Land of the Dragon’ in this the ‘Year of the Snake’. The volume for the Shanghai Gold Exchange’s benchmark cash contract surged to 19,599 kilograms yesterday from 15,641 kilograms the day before. In two days the volumes have nearly doubled and surged from 10,094 kilograms to 19,599 or 94%.
- Japan’s Stocks Correction Raises Stakes for Abe’s Growth Plan (BBG)
- China Failure to Grow With $1 Trillion Is Warning to Li (BBG)
- Blankfein Leads Bank CEO Pay With $26 Million Deemed Overpaid (BBG)
- IMF says ‘no evidence yet’ of Abenomics hurting other economies (FT)
- Europe Seeks CFTC Delay in Imposing Swaps Rules on Banks (BBG)
- Fed's Rosengren: 'Modest' QE3 cut may make sense in a few months (Reuters)
- Who’s who of Obama lobbyists pushes Keystone pipeline (FT)
- China to Study Joining U.S.-Led Trade Accord After Japan Added (BBG)
Presenting the key assets JPY108 trillion ($1.16 trillion) GPIF pension fund as of September 2012:
- JPY 68.3 trillion in government bonds: 64%
- JPY 12.6 trillion in foreign stocks: 12%
- JPY 12 trillion in Japanese stocks: 11%
- JPY 9.6 trillion in foreign bonds: 9%
In other words, the fact that the GPIF's overall domestic equity allocation will not decline from 11%, or a little over $100 billion, is the main catalyst for today's move. Putting $100 billion in context: this is how much liquidity the BOJ injects in the stock market in under two months.
One look at the 5%+ plunge in the Nikkei overnight and one would be allowed to wonder if this was it for Abenomics: with a 15% drop from recent highs, and the TOPIX Real Estate index down by more than 20%+ since mid-April, entering a bear market, what's worse is that even the "wealth effect" Mrs Watanabe fanatics would be excused from having much hope going forward. The problem, however, is that in a world in which only the USDJPY matters as a risk signal, and only the stock market remains as a last bastion of "hope", the overnight weakness pushing the dollar yen to just 50 pips above 100 threatened to crush the manipulated rally and force everyone to doubt the sustainability of central planning. So, sure enough, literally seconds we got the much needed stick save without which everything could have come tumbling down, namely based on an unsourced article out of Reuters that Japan's Public Pension Fund is considering a change to its portfolio strategy that could allow domestic equity share of investments to rise in rallying market. The immediate result was an instantaneous surge in the USDJPY which in turn dragged global risk higher across the board, simply due to what algos deemed as yet another procyclical last minute rescue. More importantly this was nothing but a squeeze catalyst coming at just the right time before market open to prevent a rout in global equities. Ironically, that we are back to the Reuters "sticksave" unsourced article, indicates just how weak the reality behind the scenes must be.
Abenomics is riddled with inconsistencies. He wants the world's biggest bond market to sit still while he tells them they are going to lose money year-after-year (if his inflation goals are met). He wants to spark a renaissance by lowering the JPY and creating inflation but he doesn't want real wages to drop. Of course, the CNBC anchor's ironic perspective that the 80% domestic bond holdings of JGBs will 'patriotically sit back and take the loss' is in jest but it suggests something has to give in the nation so troubled. In fact, as Diapason's Sean Corrigan notes, that is not what has been happening, "every time the BoJ is in, the institutional investors are very happy to dump their holdings to them." On the bright side, another CNBC apparatchik offers, this institutional selling will lead to buying other more productive assets to which Corrigan slams "great, so we have yet another mispriced set of capital in the world, that'll help won't it!" The discussion, summarized perfectly in this brief clip, extends from the rate rise implications on bank capital to the effect on the deficit, and from the circular failure of the competitive devaluation argument.