Opposite Day
Doug Nolan
So much for “risk off,” at least for this week.
The Semiconductor Index surged 9.9%, more than recovering from last week’s 9.2% drubbing.
The Nasdaq100 jumped 4.0%, getting back much of last week’s 5.4% loss.
After dropping 13.6%, Nvidia this week surged 15.1%.
Not for the faint of heart.
Bloomberg:
“‘AI Craze’ Powers Best Week in 2024 for Stocks.”
Also from Bloomberg:
“Wall Street Humbled as Fast-Reversing Markets Confound the Pros.”
Did we learn much this week?
The bulls have plenty of fight.
We would expect nothing less, especially at this point in the cycle.
Short squeezes are alive and well.
Elon Musk will pick his spots to partake in a favorite pastime: punishing the shorts.
Tesla surged 14.4% this week, as market-pleasing talk eclipsed fundamental deterioration.
The Goldman Sachs short index jumped 4.3% this week.
The earnings picture was mixed.
Alphabet/Google and Microsoft, of course, knocked it out of the park.
Things were less than convincing elsewhere.
Meta was hit for 7.9%, with the market signaling notable newfound skepticism with the whole AI thing.
Intel’s earnings miss (stock down 6.8% this week) was another important indication that all is not well in the semiconductor space, AI boom notwithstanding.
But the bulls wrested back control.
The VIX (equities volatility) Index dropped 3.7 points to 15.0. CDS prices reversed sharply lower.
After surging 49 bps in four weeks, high yield CDS sank 22 this week to 347 bps.
Bank CDS reversed lower.
JPMorgan CDS declined three to 46 bps – following a two-week 10 bps surge.
European bank CDS more than reversed two weeks of gains.
The equities rally didn’t give fragile global bonds the warm and fuzzies.
Neither did U.S. price data (i.e., 3.7% Q1 Core PCE, 3.1% Q1 GDP Price Index, 2.8% y-o-y March monthly Core PCE…).
Ten-year Treasury yields added another four bps to 4.66%, trading this week to a six-month high.
German bund yields gained eight bps to 2.58%, rising to highs since November.
Also trading to six-month highs, UK gilt yields jumped nine bps to 4.32%.
Australian 10-year yields surged 27 bps to 4.52%, with New Zealand yields up 19 bps to 4.98%.
Japanese JGB yields added four bps to 0.88%.
The Bank of Japan (BOJ) just can’t stop playing with fire.
Rates were held unchanged at zero to 0.1% at its Friday policy meeting.
The BOJ also stuck with its bond-buying program, pushing out the anticipated shift to QT.
The bank was again compelled to reiterate that conditions would remain easy.
Meanwhile, the BOJ boosted its forecast of core CPI for the year from 2.4% to 2.8%.
Governor Kazuo Ueda conveyed little concern for yen weakness, while downplaying its inflationary impact.
Ueda:
“For now, the weak yen has not had a big impact on underlying inflation.
But prices are overshooting as a whole, and the chance of inflation moving in line with our forecasts is rising...
There’s a risk that we could see a second round of cost-push inflation.
The impact of yen moves is usually temporary. But the chance of the impact being prolonged is not zero.”
With Ueda basically announcing, “go ahead and have your way with it”, the market proceeded to take the yen out to the woodshed.
The Japanese currency was slammed 1.7% in Friday trading to 158.33 to the dollar – the low all the way back to May 1990.
From 151.76 to 158.33 in 13 sessions.
If I were a Japanese citizen, I’d be livid.
The BOJ is certainly not oblivious to the imbalances and fragilities propagated by their historic monetary experiment.
They are resolved to approach policy “normalization” with extreme caution.
I believe the BOJ delayed its policy reversal as it waited for a more hospitable global environment (waning inflation, lower bond yields, and easier global monetary policy).
Japan’s central bank has a gambling problem.
Global inflation is surprising to the upside.
Bond yields have generally surged back to highs since November.
The Fed has been forced to backtrack from its dovish pivot, with the market now pricing only 34 bps of rate reduction this year.
Yen weakness is providing key support to dollar melt-up dynamics, as the BOJ digs in its heels with super-slow-motion “normalization” in a world of fast-moving dynamics.
Ueda basically ceded the yen fragility issue to the Ministry of Finance (MOF), affirming Friday it wasn’t in the BOJ’s purview.
In a hostile world of daring speculative warfare - with the BOJ relentlessly arming the yen bears - the MOF must fear it’s outgunned.
June Japanese government bond (JGB) futures yields traded to 1.12% Thursday, the high back to November.
Yields declined slightly Friday on assurances of ongoing BOJ bond support.
Risks are mounting.
As global yields march higher, liquidity created for JGB purchases is poised to exacerbate yen weakness.
Ominously, BOJ and Ueda Friday unleashed disorderly currency trading.
Gaining 0.4% in Friday’s session, the Dollar Index ended the week at 105.94.
One would typically expect persistent demand for dollars in a “risk off” backdrop.
But the dollar has remained notably resilient, whether U.S. stocks are surging or retreating.
Moreover, stress associated with dollar strength is gaining important momentum.
The Bank of Indonesia surprised markets Wednesday as the first Asian central bank to hike rates to support a vulnerable currency.
April 24 – Bloomberg (Grace Sihombing and Claire Jiao):
“Bank Indonesia defied expectations and raised its benchmark interest rate to a record high to help guide the rupiah below the psychological level of 16,000 against the dollar by year-end.
The central bank increased the BI-Rate by 25 bps to 6.25% on Wednesday…
Global uncertainty has flared up with the dollar’s resurgence and conflict in the Middle East, requiring an ‘anticipatory, forward-looking, and preemptive’ policy response, Governor Perry Warjiyo said in a virtual briefing.
The surprise hike could set the tone for other emerging Asian central banks that are having to ramp up their currency defenses…”
Indonesian local currency bond yields surged 15 bps this week to 7.14%.
Yields have spiked 47 bps this month, and now approach the multi-year high from the October spike (7.26%).
Bonds have been under intense pressure throughout the region.
Philippine (dollar) bond yields added five bps this week (5.51%), increasing the April yield spike to 57 bps.
Yields are 31 bps higher this month in Singapore (3.38%), 27 bps in South Korea (3.67%), 20 bps in Thailand (2.73%), and 15 bps in Malaysia (3.99%).
Month-to-date currency losses include the Japanese yen 4.0%, the Philippine peso 2.5%, Indonesian rupiah 2.2%, South Korean won 2.0%, Taiwanese dollar 1.8%, and the Thai baht 1.5%.
Market concerns are mounting that currency instability is about to intensify.
April 24 – Bloomberg (James Hirai):
“The swaps market is flashing warnings there could be a dash for dollar liquidity on a scale last seen at the start of the pandemic, according to Mizuho International Plc.
Andra Belcea, head of cross-currency swaps trading at Mizuho, flags the cross-currency basis — a measure of the extra cost non-US banks face when sourcing dollars offshore instead of through their US-based branch.
Derived from the cost of exchanging cash flows in one currency for those in another, it shows the cost of dollars is now near the lows seen after central banks took emergency steps to pump liquidity into markets in the wake of the pandemic.
‘Risky asset classes are doing great,’ said Belcea. ‘But the market is wondering when the music will stop.’”
April 25 – Bloomberg (Claire Jiao, Catherine Bosley and Katia Dmitrieva):
“Investors are looking for the next policy domino to fall in Asia amid an escalating campaign against a resurgent dollar, after Indonesia used a surprise interest rate hike to defend the rupiah.
The currencies of Japan, South Korea, Thailand, Taiwan, Malaysia, the Philippines and India are all trading within sight of multi-year lows, raising the odds for local authorities to take firmer action to stem the slide.
Won and ringgit swaps, for example, are already pricing in a less dovish stance by the two local central banks.
Indonesia’s unexpected monetary tightening this week demonstrates the precarious position of central banks as they grapple with the outlook of higher-for-longer US interest rates.
Policymakers across Asia must choose between damping economic growth or protecting exchange rates that are in free-fall.”
Japan’s predicament is a major issue.
Yet the sustainability of China’s currency peg might be the elephant in the room.
The yen has devalued 11.3% versus the renminbi over the past year, with the Indonesian rupiah down 4.3%, the Thai baht 3.2%, and the Malaysian ringgit 2.2%.
With China’s apartment Bubble deflation gaining further momentum, Beijing faces huge challenges to attain growth mandates.
Maintaining competitiveness for China’s massive export sector will be a top priority.
Especially with its archrival’s economy and stock market booming, Beijing is resorting to increasingly desperate measures to hold Bubble deflation at bay.
According to Bloomberg, “China’s sovereign wealth fund likely bought at least $43 billion of onshore exchange-traded funds in the first quarter” – and this was only a portion of enormous “national team” market support.
Beijing used to claim they had studied and learned from Japan’s Bubble experience.
Chinese officials later criticized U.S. and “western” central banks for adopting inflationary QE measures.
Well, look who’s now talking central bank bond buying.
April 22 – Bloomberg:
“China’s Ministry of Finance said it supports allowing the central bank to buy and sell government bonds, reaffirming a comment by President Xi Jinping that ignited market speculation about a change of monetary strategy.
The ministry called for stepping up coordination between fiscal and monetary policy and ‘improving the mechanisms of base money injection and money supply adjustment,’ in an article written by a study group and published by the People’s Daily...
It was based on a recent book that compiled Xi’s statements about finance and economics.
In that text, Xi was quoted as saying that the People’s Bank of China should gradually increase the buying and selling of government bonds in open-market operations.”
As Beijing pushes ever harder to sustain its Bubble Economy and hold systemic debt crisis at bay, the world is watching.
Ongoing massive Credit growth ensures an only greater debacle, while Beijing directives are bringing new meaning to “malinvestment.”
Importantly, this is not the good old days when perceptions of a great and infallible Beijing meritocracy had global analysts - and rating agencies - reverent and inhibited.
The bloom is off the rose, and skepticism is these days palpable.
April 24 – CNBC (Evelyn Cheng):
“China’s state-directed economy may be creating the conditions for a new wave of bond defaults that could come as soon as next year, according to an S&P Global Ratings report…
It would be the third round of corporate defaults in about a decade, the ratings agency pointed out.
It comes against a backdrop of extremely few defaults in China amid concerns about overall growth in the world’s second-largest economy.
‘The real thing to watch for policymakers is whether the current directives are creating distorted incentives in the economy,’ Charles Chang, greater China country lead at S&P Global Ratings, said…”
Meanwhile, governments around the world are on guard.
This week from Treasury Secretary Yellen:
“So it’s important that China recognize the concern and begin to act to address it…
But we don’t want our industry wiped out in the meantime, so I wouldn’t want to take anything off the table.”
The U.S. is not alone.
April 26 – Politico (Stuart Lau, Camille Gijs and Koen Verhelst):
“For years, Brussels has repeatedly taken an emollient tone with Beijing, seeking ultimately futile dialogue on state subsidies and overcapacity in sectors such as steel, aluminum and green tech, rather than choosing direct confrontation and a tit-for-tat trade war.
Now the gloves are off — as the political consensus grows that Europe needs to protect core technologies.
The writing has been on the wall since October, when the EU launched a probe into China's state support of electric vehicles.
Brussels has now followed up with investigations into wind turbines and hospital equipment to ‘rebalance the EU-China partnership.’”
The U.S., Europe and the “western alliance” are also sick and tired of China’s support for Putin’s Russia.
Beijing is also advancing relationships with Iran and North Korea.
If I were advising Beijing on measures necessary to underpin the renminbi, I’d start with a simple proposition: have an Opposite Day.
April 26 – Bloomberg (Simon White):
“Gold trading in China has exploded and stocks of copper have risen sharply prompting speculation that policymakers are on the brink of a yuan devaluation.
Even though it’s still a tail-risk, it’s one requiring greater vigilance as the economy becomes increasingly deflationary, redoubling capital outflow pressures.
The yuan has been steadily falling versus the dollar this year.
So far the decline has been measured, but activity in commodities has prompted conjecture that China is about to orchestrate a significant one-off yuan devaluation.
Futures gold trading in China has moved sharply higher, and the net long position has been rising.
Also, there has been a sharp rise in China’s copper stocks.
Copper as well as other commodities is used as a source of collateral in China.”
April 25 – Bloomberg (Tania Chen and Ruth Carson):
“In the scenario that China devalues its currency, it could prompt other exporter countries in the region to follow suit, according to Jefferies LLC.
‘If China were to devalue by 5% or 10%, then we would see currencies in the region follow suit to the tune of say 3% or 7%, respectively,’ wrote Brad Bechtel global head of foreign-exchange wrote...
‘This would force a more substantial response by everyone in the region.”
April 26 – Reuters:
“China’s sliding yuan has been hitting the weak end of the band in so-called cash settlement transactions this week, making it challenging for banks and businesses on the mainland to transact, traders say.
Under unrelenting pressure from rising U.S. yields and outflows from China, the yuan is at five-month lows against the dollar and has been declining to near its 2% policy band limit each day.
The yuan’s decline to the weak end of the permissible band underscores the heavy demand for dollars and rising depreciation pressures on the currency.
Short-term swap markets show deeply skewed demand-supply conditions for the yuan, which could potentially lead to panic and spillovers to bond and equity markets.”
I remember the summer of 1987, watching spiking bond yields and increasingly disorderly currency markets – along with a crazy equities speculative melt-up.
There was the 1994 Fed tightening and bond market dislocation that triggered tesobonos deleveraging and currency collapse in Mexico.
Then in 1997, after Thailand burned through their international reserves, the collapse of the Thai baht peg ignited a catastrophic domino Asian Tiger collapse.
The next year it was Russia and LTCM.
The CBB chronicled the acute fragility of Argentina’s dollar currency regime up to its devastating 2002 collapse.
Currency crises are destabilizing and horrible.
The current setup is the most alarming I’ve witnessed during my career.
It’s not today unreasonable to contemplate China stockpiling gold and commodities ahead of a currency devaluation.
Seems reasonable for Asian economies, and EM more generally, to build inventories while they have the liquidity to do so.
Reasonable and inflationary.
And as financial asset Bubbles turn increasingly vulnerable, a shift toward hard assets becomes all the more compelling.
It has the feel of a major cycle in transition.
Every reason to expect volatility is here for the duration.
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