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Stocks Drop As Trade War Returns; Japanese Bond Rout Leads To Emergency Margin Call

August 1, 2018

Stocks Drop As Trade War Returns; Japanese Bond Rout Leads To Emergency Margin Call

The latest trade war truce lasted less than a day, and after stocks jumped yesterday following an early report that Mnuchin had resumed trade talks with his Chinese counterpart, a late Tuesday report that the Trump admin is planning to increase the tariff rate on some $200BN of Chinese imports from 10% to 25% led to an immediate slide in risk assets around the globe, and this morning global stocks and futures were a sea of red despite Apple’s stellar results which helped lift the Nasdaq.

In response, China again warned the U.S. against “blackmailing and pressuring” it over trade. China’s Ministry of Foreign Affairs said it will fight back if the U.S. further increases tariffs as it now contemplated. “If the U.S. takes measures to further escalate the situation, we will surely take countermeasures to uphold our legitimate rights and interests,” spokesman Geng Shuang said at a regular press conference on Wednesday.

The return of trade war tensions initially sent the dollar higher across the board, while the Yuan tumbled, with the offshore Yuan tumbling to a one year low of 6.8642 against the dollar, before the PBOC intervened again, and the onshore Yuan reversed losses mid-afternoon after a large Chinese bank was seen selling dollars. According to Bloomberg, at least one big Chinese bank started to sell dollars aggressively around 6.83 yuan per USD, and those flows disappeared after rate went to 6.82. A large Chinese bank also sold dollars onshore earlier in the day, spurring other banks to follow.

The big overnight move, however, wasn’t in China but in Japan, where one day after the BOJ tweaked its monetary policy while leaving its YCC largely intact, bond traders tried to find the new tolerance breaking point for 10Y JGB.

…click on the above link to read the rest of the article…

BOJ Intervenes For Third Time In A Week: Offers To Buy Unlimited Bonds To Stabilize Markets

July 30, 2018

BOJ Intervenes For Third Time In A Week: Offers To Buy Unlimited Bonds To Stabilize Markets

Ahead of the potentially dramatic BOJ decision tonight, the Japanese bond market is becoming increasingly jittery.

After 10Y JGBs sold off early in the session, with yields rising as high as 0.11% – the highest level in almost a year and a half – as the market continues to test the Bank of Japan’s intentions ahead of its policy decision, on Monday morning, the BOJ intervened again, offering to buy an unlimited amount of bonds for a third time in a week.

While unlimited in size, the central bank offer, made at 0.1% for bonds with 5-10 year maturities, drew some 1.6 trillion yen ($14.4 billion) of bids which were all accepted, the central bank reported just around 1am EDT. The 10-year yield pared the day’s advance after the move was announced.

Following the announcement, the 10-year JGB yield slid half basis point lower to 0.095%, compared with the 0.11% touched before the operation. This is over 3x more than the close of 0.03% just ten days ago ahead of media reports the BOJ will adjusted the parameters of its YCC.

As Bloomberg notes, Monday’s purchase was significantly larger than the 94 billion yen bought in the latest prior on Friday, as prevailing bond prices were below where the BOJ was buying, allow investors to take advantage of the free money.

The fixed rate of 0.10% for the operations on Friday and Monday was lower than the 0.11% offered at four previous operations for the five-to-10 year maturities. Monday’s fixed-rate operation was the seventh since the policy was introduced, and the first time it has conducted three operations within a single week as shown below.

…click on the above link to read the rest of the article…

Japan still leads the way towards our endgame

December 19, 2015

Japan still leads the way towards our endgame

japan_SISuccessful investors live by a golden rule: what the mainstream financial media talks about is not important. They focus on what they don’t hear instead. So forget about Yellen for a second. Let go of Draghi, oil, the South African rand and Syria. That’s all in the now. But investing is about the future.

We are convinced there is one proverbial elephant in the room in particular that will shape our future. And that elephant is Japan. The ‘widowmaker’ trade has been claiming financial lives for multiple decades now. That is, short JGBs, or Japanese Government Bonds, was so obvious a trade that it never worked. The 10-year yield currently trades at 0.3%, which is close to the all-time low. We’re still waiting for the shoe to drop.

Will it ever drop? We believe it will. ‘Drop’ might not be the appropriate word. The accumulation of imbalances might trigger a cascade of events that will shake the world at its core. Let’s investigate some data.

Japan’s debt-to-GDP ratio has hit a unprecedented 230%. You probably knew that. But it doesn’t keep you awake at night. We are genetically wired to focus on acute danger. If a tiger approaches us, we focus. But if stands still and doesn’t move for years, we turn around in search for other dangers. Wise investors remind themselves constantly of the tiger though. They never let their guard down.

What about the pace at which debt-to-GDP is ramping up? The budget deficit tells us all we need to know.

For six years in a row already, Japan scored around minus 8%. And given the flattish GDP, these annual percentages head straight to the public debt pile. Japan’s long term potential real GDP-growth rate is simply close to zero, given the demographics. The latest quarterly print was a minus 0.3%. This makes the debt grow even faster.

…click on the above link to read the rest of the article…

Bond Crash Continues – Aussie & Japan Yields Burst Higher

June 3, 2015

Bond Crash Continues – Aussie & Japan Yields Burst Higher

The carnage in Europe and US bonds is echoing on around the world as Aussie 10Y yields jump 15bps at the open (to 3.04% – the highest in 6 months) and the biggest 2-day spike in 2 years.  JGBs are also jumping, breaking to new 6-month highs above 50bps once again raising the spectre of VAR-Shock-driven vicious cycles…

 

 

The spectre of a self-feeding dynamic is something we’ve discussed at length before, most notably in 2013 when volatility-induced selling — reminiscent of the 2003 JGB experience — hit the Japanese bond market again, prompting us to ask the following rhetorical question:

What happens to JGB holdings as the benchmark Japanese government bond continues trading with the volatility of a 1999 pennystock, and as more and more VaR stops are hit, forcing even more holders to dump the paper out of purely technical considerations? 

The answer was this: A 100bp interest rate shock in the JGB yield curve, would cause a loss of ¥10tr for Japan’s banks.

What we described is known as a VaR shock and simply refers to what happens when a spike in volatility forces hedge funds, dealers, banks, and anyone who marks to market to quickly unwind positions as their value-at-risk exceeds pre-specified limits.

Predictably, VaR shocks offer yet another example of QE’s unintended consequences. As central bank asset purchases depress volatility, VaR sensitive investors can take larger positions — that is, when it’s volatility times position size you’re concerned about, falling volatility means you can increase the size of your position. Of course the same central bank asset purchases that suppress volatility sow the seeds for sudden spikes by sucking liquidity from the market. This means that once someone sells, things can get very ugly, very quickly.

Here’s more from JPM on the similarities between the Bund sell-off and the JGB rout that unfolded two years ago:

 

…click on the above link to read the rest of the article…

It’s Official: The BoJ Has Broken The Japanese Stock Market

May 14, 2015

It’s Official: The BoJ Has Broken The Japanese Stock Market

As those who follow such things are no doubt aware, The Bank of Japan often says some very funny things about inflation expectations and monetary policy. Essentially, the bank is forced to constantly defend its QE program because as it turns out, monetizing the entirety of gross JGB issuance and amassing an equity portfolio worth just shy of $100 billion on the way to cornering the ETF market comes across as insanely irresponsible even in a world that is now defined by insanely irresponsible central banks.

Perhaps the best example of the BoJ’s absurd rhetoric came in late March when Governor Haruhiko Kuroda said the following about the bank’s 10 trillion yen equity portfolio:

  • KURODA: BOJ’S ETF PURCHASES AREN’T LARGE

As we noted at the time, either we don’t know what large means, or Kuroda is simply making things up as he goes along. Meanwhile, the BoJ continues to provide Nikkei plunge protection on an almost daily basis. Here’s what we said in March:

The world has now officially given up any pretensions that Japan’s elephantine QE program isn’t underwriting the rally in Japanese stocks. Not only is the Bank of Japan buying ETFs, they’re targeting their purchases to (literally) ensure that stocks can’t fall by stepping in when things look weak at the open. Unfortunately, Kuroda looks set to run up against the extremely inconvenient fact that while, in his lunacy, he can print a theoretically unlimited amount of money, the universe of purchasable ETFs is limited and so eventually, the BoJ will own the entire market.

…click on the above link to read the rest of the article…

 

 

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