As we kickoff what promises to be another week of trading, here is a snapshot of the wild trading that has taken place today and what is causing the madness in global markets.
A Wild Night Of Trading
July 23 (King World News) – Here is a portion of what Peter Boockvar wrote today as the world awaits the next round of monetary madness: It was a wild night in Japanese bonds overnight as the market responded to the Friday report that the BoJ was contemplating a change to policy. After closing at .035% on Friday, the 10 yr JGB yield jumped by 5 bps to the highest level since February. In immediate response, the BoJ announced that they would buy an unlimited amount at a yield of .11% in order to keep the response in check. The 40 yr JGB yield, which I like to watch since it’s least affected by yield curve control, spiked by 11 bps to .92% to also the highest since February…
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Boockvar continues: What drove the story Friday and the move in bonds overnight is finally the realization on the part of the BoJ that they’ve dramatically impaired the profitability of its banking system that has no yield curve to play with along with negative interest rates. Thus, allowing some steepening in the yield curve is for the sole purpose of helping banks instead of a declaration of victory with their inflation goals.
The Japanese Topix bank stock index closed Friday at a level it was at in 2014 but spiked by 3.5% today. The Nikkei itself closed down by 1.3% on the news and the rise in the yen. The BoJ meets next week and what I think they’ll end up doing is switch yield curve control from 10 years out to 5 years instead.
This in turn helped to steepen the US curve on Friday but certainly the Trump comments on Fed policy did as well. I’m of the opinion that if Powell at some point does buckle under the pressure of the President (I’m just saying IF and not giving an opinion on whether he will) and doesn’t hike rates to the extent he wanted to at the same time the inflation stats deserve more, the long end of the yield curve will tighten for him. Thus I believe this was also a factor in the steepening seen Friday. The 2s/10s spread on Friday widened by 5 bps and is holding that move today.
China was the other story overnight as the Foreign Ministry spokesman said they are not trying to drive the yuan lower. He said:
“The exchange rate of China’s RMB is determined by the market. There are ups and downs. It’s a two way float.”
On the recent new tariff threat, he also said:
“Threats and intimidation will never work on our Chinese people and we are confident of our ability to uphold our interests…The US is bent on provoking this trade war. China does not want a trade war but we are not afraid of one.”
On the currency, China knows they are trying to shift their economy to a service based, consumer focused one thus I do believe they don’t want a pronounced fall in the yuan. Thus, if it were to happen, it would be the market that brings it lower rather than official policy but policy would try to keep the move orderly. The yuan is lower today as the Foreign Ministry comments didn’t help stem its decline.
The other news out of China is the continued stealth monetary easing going on where they are providing longer term funds to banks in order to encourage them to go lend it out. The medium term lending facility offered today was the biggest since 2014 at $74b (about 500b yuan). This follows the RRR cuts seen this year. They keep jumping from a need to deleverage (aka, slowing credit growth) to the desire for keeping the growth story going when it looks like it’s faltering. This was also reflected in new rules given on bank wealth management products that weren’t as strict as expected. On the easing, the Shanghai comp did close up 1.1% while the H share index was higher by .5%.
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