After yesterday’s violent gap up in stocks across the globe in response to the “expected” outcome from the French election, today the risk on sentiment has continued if to a lesser extent, with stocks in Europe, Asia all rising while S&P futures point to a higher open. Yen, gold decline, while the euro traded as high as 1.09 this morning before fading some gains; oil is up modestly.
While today’s surge may have been more muted, world stocks hit a new record high on Tuesday, with investors still cheering Macron’s victory in the first round of the French presidential election, supported by speculation about U.S. tax reform and the overnight report that Trump has conceded on the border wall, eliminating a government shutdown as a potential risk. As shown below, the MSCI All World Index has jumped to a new all time high, boosted by strong Asian markets.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.6%, hovering near its highest level since June 2015 hit earlier in the session, on its fourth straight day of gains. Japan’s Nikkei rose more than 1 percent to a three-week high aided by a weaker yen. South Korea’s also advanced 0.7 percent to its highest level since April 2015. China equities climbed from a three-month low on speculation that a selloff over concerns of a regulatory crackdown were overdone. Australia and New Zealand were closed for Anzac Day.
European stocks hovered near a 20-month high, with the Dax flirting with all time highs. The Stoxx Europe 600 index edged 0.2% higher after jumpin 2.1% on Monday to the highest since August 2015, with property and technology shares helping to underpin a global rally. French shares pulled back 0.1 percent, having risen 4.1 percent on Monday in their biggest daily gain since August 2012. Futures on the S&P 500 added 0.1 percent. The index climbed 1.1% Monday to within 1% of its all-time closing high.
These gains helped push MSCI’s world stocks index to a fresh all-time high after chalking up its biggest rise since shortly after Britain’s vote last June to leave the European Union.
With every other asset class roundtripping the November election outcome, it was only a matter of time before Japan’s 10Y JGB – which on February 2 briefly peaked above the BOJ’s “yield curve controlling” 0.10% yield ceiling, rising as high as 0.15% to the shock of a market ready to declare that Japan had finally lost control of its bond market – retraced the entire “reflationary” move from 0.0% to 0.1%. And, sure enough, following today’s violent deflationary capitulation moments ago Japan’s JGB 0.1% of 2027 once again dipped back under 0%, sliding as low as -0.003% on Wednesday morning in Japan.
What happens next?
According to traders, focus will turn to whether the BOJ, in pursuing “yield curve control”, will reduce the amount of JGBs it monetizes. “Amid favorable environment for bonds, focus is on BOJ as whether there will be a reduction in purchase amounts will test the bank’s tolerance for 10-year yield falling into negative,” Katsutoshi Inadome, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities, wrote in note according to Bloomberg.
As a reminder, in the BOJ’s latest “rinban” or open market operation, it bought around 280bn yen of 1-to-3, 350bn yen of 3-to-5 and 450bn yen of 5- to-10-year maturities at previous operation. And material declines from these amounts may lead result in the market roiling again, on fears the BOJ is being forced into an involuntary taper by external deflationary forces.
Meanwhile, the USDJPY continues to track treasury yields tick for tick, and as Yujiro Goto, senior FX strategist at Nomura in London said, the “dollar/yen remains top-heavy with yields falling and weak U.S. economic data. It’s hard to take risk aggressively ahead of the French election, keeping it in 108-109 range.”
Which means that while continued declines in Japanese yields are virtually assured all else equal, it will be up to the BOJ to telegraph to the market just how low it will let the 10Y drop. Should Kuroda unveil another “taper”, the result may be the uncoordinated move in global bond markets, leading to a negative feedback loop of JGB selling and TSY bond buying, which incidentally is the worst case scenario for global central bankers whose primary intention over the past year has been to achieve as much rate coordination as possible.
The number of listed Japanese companies declaring bankruptcy in the 2016 financial year fell to zero for the first time since the collapse of the bubble. The zero-bankruptcy feat, which has been achieved just six times since 1964 was last achieved in 1990.
Bankruptcies among listed companies have been consistently low since the Abenomics economic revival campaign got going in 2013 – the year the Bank of Japan began its qualitative and quantitative easing programme. In February last year, the central bank introduced its negative interest rate policy, underscoring the historically low debt servicing burden on Japanese companies.
Just two bankruptcies of listed companies were logged in fiscal 2015, according to Teikoku Databank. The all-time peak of 45 was reached in 2008 at the height of the global financial crisis.
But analysts point out that those figures do not tell the full story as they track only companies that have undergone court-led liquidation.
Tokyo Shoko Research survey in August last year showed that in a year where around 8,500 companies went through court led bankruptcy, a total of about 27,000 either suspended or dissolved their businesses.
Prior to Friday’s report, IMF currency data was limited to the US dollar, euro, Japanese yen, UK pound sterling, Australian dollar, Canadian dollar and Swiss franc, and an indistinguishable category of “other currencies.”
“With the separate identification of reserves in RMB [Renminbi], eight currencies are now distinguished,” the IMF publication stated.
Chinese holdings of US dollars were $5.1 trillion at the end of 2016, compared with $10.8 trillion in total foreign currency reserves, the report explained.
The remainder was divided among other currencies, with euro holdings the largest at $1.6 trillion, according to the IMF.
PBOC open market operations today … well, the bank says none today. The Bank says bank liquidity is high.
Huh, the Wall Street Journal got that right …
A quiet one … I shoulda let them write the Wrap
Meeting of finance chiefs from the Group of 20
Traders are monitoring how China and Japan will react to pressure from Mr. Mnuchin to strengthen their currencies against the U.S. dollar, said Khoon Goh, head of research for Asia at ANZ. “There is a lot of interest if there will be any material changes out of the G-20,” he said.
US Treasury Sec. Mnuchin is expected to urge China, Japan, Germany and other G-20 members to keep their promise to not use their exchange rates for competitive gains
Link to the Journal, may be gated, but you get the gist.
With the Fed expected to further tighten financial conditions following its now guaranteed March 15 rate hike, and the ECB recently announcing the tapering of its QE program from €80 to €60 billion monthly having run into a substantial scarcity of eligible collateral, the third big central bank – the BOJ – appears to have also quietly commenced its own monteary tightening because, as Bloomberg calculates looking at the BOJ’s latest bond-purchase plan, the central bank is on track to miss an annual target, by a substantial margin, prompting investor concerns that the BOJ has commenced its own “stealth tapering.”
While in recent weeks cross-asset traders had been focusing on the details and breakdown of the BOJ’s “rinban” operation, or outright buying of Japan’s debt equivalent to the NY Fed’s POMO, for hints about tighter monetary conditions and how the BOJ plans to maintain “yield curve control”, a far less subtle tightening hint from the BOJ emerged in the central bank’s plan released Feb. 28, which suggests a net 66 trillion yen ($572 billion) of purchases if the March pace were to be sustained over the following 11 months. As Bloomberg notes, that’s 18 percent less than the official target of expanding holdings by 80 trillion yen a year.
Some more details: the central bank forecast purchases of 8.9 trillion yen in bonds in March, based on the midpoint of ranges supplied in the operation plan. Maintaining that pace for 12 months will see it accumulate about 107 trillion yen of debt. At the same time, 41 trillion yen of existing holdings will mature, leaving it with a net increase of 66 trillion yen, well below the stated goal of 80 trillion yen.
Minutes from the Bank of Japan December 19 & 20 meeting
- Most members shared view momentum for Japan’s inflation to reach 2 pct inflation was being maintained
- Some members said factors that would support rise in prices going forward had been increasing
- One member said recent yen depreciation might push up prices in short run but would not raise underlying trend in inflation
- Many members said yield curve control had been functioning as intended, JGB yield curve had been formed smoothly despite global yield rises
- Many members said BOJ must pursue powerful monetary easing as still long way to go to hit 2 pct inflation target
- A few members pointed to market views that BOJ wants to guide 10-yr JGB yield at range of -0.1 to 0.1 pct, said it was inappropriate to set such “uniform standards”
- One member said it was uncertain whether amount of JGB purchases would decrease going forward under yield curve control
- One member said BOJ should set amount of its JGB purchases as operating target and make sure to reduce it incrementally
- One member said BOJ should allow for natural rise in long-term rates if they reflect prospects for improvement in Japan’s economy, prices