July 13, 2017, 4:00 pm EST Invest Alongside Billionaires For $297/Qtr
With some global stock barometers hitting new highs this morning, there is one spot that might benefit the most from this recently coordinated central bank promotion of a higher interest environment to come. It’s Japanese stocks.
First, a little background: Remember, in early 2016, the BOJ shocked markets when it cut its benchmark rate below zero. Counter to their desires, it shook global markets, including Japanese stocks (which they desperately wanted and needed higher). And it sent capital flowing into the yen (somewhat as a flight to safety), driving the value of the yen higher and undoing a lot of the work the BOJ had done through the first three years of its QE program. And that move to negative territory by Japan sent global yields on a mass slide.
By June, $12 trillion worth of global government bond yields were negative. That put borrowers in position to earn money by borrowing (mainly you are paying governments to park money in the “safety” of government bonds).
The move to negative yields, sponsored by Japan (the world’s third largest economy), began souring global sentiment and building in a mindset that a deflationary spiral was coming and may not be leaving, ever—for example, the world was Japan.
And then the second piece of the move by Japan came in September. It was a very important move, but widely under-valued by the media and Wall Street. It was a move that countered the negative rate mistake.
By pegging its ten-year yield at zero, Japan put a floor under global yields and opened itself to the opportunity to doing unlimited QE. They had the license to buy JGBs in unlimited amounts to maintain its zero target, in a scenario where Japan’s ten-year bond yield rises above zero. And that has been the case since the election.
The upward pressure on global interest rates since the election has put Japan in the unlimited QE zone — gobbling up JGBs to push yields back down toward zero — constantly leaning against the tide of upward pressure. That became exacerbated late last month when Draghi tipped that QE had done the job there and implied that a Fed-like normalization was in the future.
So, with the Bank of Japan fighting a tide of upward pressure on yields with unlimited QE, it should serve as a booster rocket for Japanese stocks, which still sit below the 2015 highs, and are about half of all-time record highs — even as its major economic counterparts are trading at or near all-time record highs.
March 14, 2017, 4:15pm EST Invest Alongside Billionaires For $297/Qtr
As we head into the Fed tomorrow, stocks have fallen back a bit today.
Yesterday we looked at the nice 45 degree climb in stocks since Election Day. And the big trendline that looked vulnerable to any disruption in the optimism that has led to that climb. That line gave way today, as you can see.
The run up, of course, was on the optimism about a pro-growth government, coming in after a decade of underwhelming growth. The dead top in stocks took place the day after President Trump’s first speech before the joint sessions of Congress. There is a phenomenon in markets where things can run up as people “buy the rumor/news” and then sell-off as people “sell the fact.”
It’s a reflection of investors pricing new information in anticipation of an event, and then selling into the event on the notion that the market has already valued the new information. It looks like that phenomenon may be transpiring in stocks here, especially given that the timeline of tax reform and infrastructure spending looks, now, to be a longer timeline than was anticipated early on.
And as we discussed yesterday, it happens to come at a time where some disruptive events are lining up this week: from a Fed rate hike, to Dutch elections, to Brexit, to G20 protectionist rhetoric.
Stocks are up 6% year-to-date, still in the first quarter. That’s an aggressive run for the broad stock market, and we’re now probably seeing the early days of the first dip, on the first spell of profit taking.
What about oil? Oil and stocks traded tick for tick for the better part of last year, first when oil crashed to the mid-$20s, and then when oil proceeded to double from the mid-$20s. Over the past few days, oil has fallen out of it’s roughly $50-$55 range of the Trump era. Is it a drag on stocks and another potential disrupter? I don’t think so. Oil became a risk to stocks and the global economy last year because it was beginning to trigger bankruptcies in the American shale industry, and was on pace to spread to banks, oil producing countries and the global financial system. We now have an OPEC production cut under the belt and a highly influential oil man, Tillerson, running the State Department. With that, oil has been very stable in recent months, relative to the past three years. It should stay that way – until demand effects of fiscal policy start to show up, which should be very bullish for oil.
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March 13, 2017, 4:15pm EST Invest Alongside Billionaires For $297/Qtr
This week will be a huge week for markets. Stocks continue to hover around record highs. Rates (the 10 year yield) sit at the highest level in three years.
This snapshot alone suggests a world that continues to believe that pro-growth policies “trump” all of the risks ahead. At the very least, it’s pricing in a world without disruptions. But disruptions look likely.
Here’s a look at stocks as we enter the week. Still in a 45 degree uptrend since the election.
But if we take a longer term look, this trendline looks pretty vulnerable to any surprise.
Let’s take a look at the disruptions risks:
There was a chance that the official execution of Brexit may have come as soon as tomorrow — the UK leaving the European Union by triggering Article 50 of the Treaty of Lisbon. That looks unlikely now, but could come in the coming weeks. To this point the Bank of England has done a good job of responding and promoting stability which has led to financial markets pricing in an optimistic outcome.
We have the Fed on Wednesday. They will hike for the third time in the post-financial crisis era. We don’t know at what point higher interest rates, in this environment, might choke off growth that is coming from the fiscal side.
This next chart looks like rates might run to 3% on the 10-year. That would do a number on housing, IF tax reform and an infrastructure spend out of the White House come later than originally anticipated (which is the way it looks).
We also have the Bank of Japan and Bank of England meeting on rates this week. Let’s hope they have a very boring, staying the path, message. That would mean extremely stimulative policies for the foreseeable future 1) in the case of Japan, to continue to promote global liquidity and anchor global yields, and 2) in the case of the UK, to continue to promote stability in the face of uncertainty surrounding Brexit.
Keep this in mind: The Bank of Japan’s big QE launch in 2013 is a huge reason the Fed was able to end QE in the first place, and start its path of normalization. The BOJ launched in April of 2013. Bernanke telegraphed “tapering” a month later. The Fed officially ended tapering on October 29, 2014. Stocks fell 10% into that official ending of Fed QE. On October 31, 2014 (two days later), the BOJ surprised the world with bigger, bolder QE (a QE2). Stocks rallied.
Finally, to end the week, we have a G-20 finance ministers meeting. This is where all of the trade and dollar rhetoric from the new administration will be front and center. So the news/event outlook looks like some waves should be ahead. But any dip in stocks would be a great buying opportunity.
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October 31, 2016, 4:15pm EST
As we discussed on Friday, the dominant theme last week was the big run-up in global yields. This week, we have four central banks queued up to decide on rates/monetary policy.
With that, let’s take a look at the key economic measures that have been dictating the rate path or, rather, the emergency policy initiatives of the past seven years. Do the data still justify the policies?
First up tonight is Australia. The RBA was among the last to slash rates when the global economic crisis was unraveling. They cut from 7.25% down to a floor of just 3% (while other key central banks were slashing down to zero). And because China was quick to jump on the depressed commodities market in 2009, gobbling up cheap commodities, commodities bounced back aggressively. And the outlook on the commodity-centric Australian economy bounced back too. Australia actually avoided official recession even at the depths of the global economic crisis. With that, the RBA was quick to reverse the rate cuts, heading back up to 4.75%. But the world soon realized that emerging market economies could survive in a vacuum. They (including China) relied on consumers from the developed world, which were sucking wind for the foreseeable future.
The RBA had to, again, slash rates to respond to another downward spiral in commodities market, and a plummet in their economy. Rates are now at just 1.5% – well below their initial cuts in the early stages of the crisis.
But the Australian economy is now growing at 3.3% annualized. The best growth in four years. But inflation remains very low at 1.7%. Doesn’t sound bad, right? The August data was running fairly close to these numbers, and the RBA CUT rates in August – maybe another misstep.
The Bank of Japan is tonight. Remember, last month the BOJ, in a surprising move, announced they would peg the 10 year yield at zero percent. That has been the driving force behind the swing in global market interest rates. At one point this summer $12 trillion worth of negative yielding government bonds. The negative yield pool has been shrinking since. Japan has possibly become the catalyst to finally turn the global bond market. But pegging the rate at zero should also serve as an anchor for global bond yields (restricting the extent of the rise in yields). That should, importantly, keep U.S. consumer rates in check (mortgages, auto loans, credit card rates, etc.). Also, importantly, the BOJ’s policy move is beginning to put downward pressure on the yen again, which the BOJ needs much lower — and upward pressure on Japanese stocks, which the BOJ needs much higher.
With that, the Fed is next on the agenda for the week. The Fed has been laying the groundwork for a December rate hike (number two in their hiking campaign). As we know, the unemployment rate is well into the Fed’s approval zone (around 5%). Plus, we’ve just gotten a GDP number of 2.9% annualized (long run average is just above 3%). But the Fed’s favorite inflation gauge is still running below 2% (its target) — but not much (it’s 1.7%). Janet Yellen has all but told us that they will make another small move in December. But she’s told us that she wants to let the economy run hot — so we shouldn’t expect a brisk pace of hikes next year, even if data continues to improve.
Finally, the Bank of England comes Thursday. They cut rates and launched another round of QE in August, in response to economic softness/threat following the Brexit vote. There were rumors over the weekend that Mark Carney, the head of the BOE, was being pushed out of office. But that was quelled today with news that he has re-upped to stay on through 2019. The UK economy showed better than expected growth in the third quarter, at 2.3%. And inflation data earlier in the month came in hotter than expected, though still low. But inflation expectations have jumped to 2.5%. With rates at ¼ point and QE in process, and data going the right direction, the bottom in monetary policy is probably in.
So the world was clearly facing deflationary threats early in the year, which wasn’t helped by the crashing price of oil. But the central banks this week, given the data picture, should be telling us that the ship is turning. And with that, we should see more hawkish leaning views on the outlook for global central bank policies and the global rate environment.
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October 27, 2016, 3:15pm EST
Last week we talked about the set up for a move in global bond yields. And we discussed the case for why the bond market may have had it very wrong (i.e. rates have been too low, pricing in way too pessimistic a view on the current environment).
Well, today rates have finally started to remind people of how quickly things can change. The U.S. 10 year yield finally broke above the tough 1.80% level and is now trading 1.85%. German yields have now swung from negative territory just three days ago, to POSITIVE 19 basis points at the highs today. Importantly, German yields are now ABOVE pre-Brexit levels.
Still, we’re approaching a second Fed rate hike and U.S. yields are almost 1/2 point lower than where they traded just following the Fed’s first hike in December of last year. As for German rates (another key benchmark for world markets), we found with the Fed in its three iterations of QE, that QE made market rates go UP not down, as people began pricing in a better outlook. That’s yet to happen in Germany. The 10 year yield was closer to 40 basis points when they formally kicked off QE – still above current levels.
But remember this chart we looked at last week.
In the white box, you can see the screaming run-up in yields last year. The rates markets had a massive position squeeze which sent ten–year German bond yields from 5 basis points (near zero) to 106 basis points in less than two months — a 20x move. U.S. ten–year yields (the purple line in the chart below) moved from 1.72% to 2.49% almost in lock–step.
This time around, as we discussed last week, let’s hope a rise in rates is orderly and not messy. Another sharp rise in market rates like we had last year would destabilize global markets (including the very important U.S. housing market).
But the buffer this time around should be the Bank of Japan. Remember, the Bank of Japan, just last month announced they would peg the Japanese 10 year yield at zero. Even with the divergent monetary policies in Europe and Japan relative to the U.S. (central bank rate paths going in opposite directions), the spread between U.S. rates and European and Japanese rates should stay tame. That means that Japan’s new policy of keeping their 10 year yield at zero will/should prevent a run away U.S. interest rate market – at least until there is a big upgrade in the expectation in U.S. growth. On that note, we get a U.S. GDP reading tomorrow.
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