by Tyler Durden
One look at the 5%+ plunge in the Nikkei overnight and one would be allowed to wonder if this was it for Abenomics: with a 15% drop from recent highs, and the TOPIX Real Estate index down by more than 20%+ since mid-April, entering a bear market, what's worse is that even the "wealth effect" Mrs Watanabe fanatics would be excused from having much hope going forward. The problem, however, is that in a world in which only the USDJPY matters as a risk signal, and only the stock market remains as a last bastion of "hope", the overnight weakness pushing the dollar yen to just 50 pips above 100 threatened to crush the manipulated rally and force everyone to doubt the sustainability of central planning. So, sure enough, literally seconds we got the much needed stick save without which everything could have come tumbling down, namely based on an unsourced article out of Reuters that Japan's Public Pension Fund is considering a change to its portfolio strategy that could allow domestic equity share of investments to rise in rallying market.
The immediate result was an instantaneous surge in the USDJPY which in turn dragged global risk higher across the board, simply due to what algos deemed as yet another procyclical last minute rescue. More importantly this was nothing but a squeeze catalyst coming at just the right time before market open to prevent a rout in global equities. Ironically, that we are back to the Reuters "sticksave" unsourced article, indicates just how weak the reality behind the scenes must be.
Among the other considerations, if any, behind this move from Reuters:
Japan's public pension fund - a pool of over $1 trillion (659 billion pounds) is considering a change to its portfolio strategy that could allow its investment in domestic stocks to grow with a rallying market, according to people familiar with the deliberations.
The changes, yet to be finalised, would mark the most significant revision in investment strategy for the world's largest pension fund since 2006 and highlight the game-changing economic policies of Prime Minister Shinzo Abe.
Without the shift, the Government Pension Investment Fund (GPIF) could be forced to buy Japanese government bonds, already the biggest part of its portfolio by far, in a weakening and more volatile market. It could also have to sell Japanese stocks in an equity market that has rallied more than 60 percent since November even after the recent sell-off.
The fund's exposure to domestic bonds has dropped to near the bottom of the allowable limit under its established portfolio. At the same time, the allocations for overseas and domestic equities have neared their maximum limits.
So without changes, the fund would be forced to buy weakening bonds and sell rising stocks. GPIF has not detailed its current risk and return profile, but fund management have used such projections as a benchmark to ensure that the public fund is not overexposed to riskier and more volatile assets.
In other words, just like every other insolvent country, the pension fund is the last bastion of preserving the rally, when even the central bank fails. How pensioners will feel about losing their retirement money much faster than usual remains to be seen. What was notable is that Reuters, so well known for spreading disinformation during the European "headline" war, appears to be back to its old tricks:
The sources, who declined to be identified because they were not authorised to discuss the pending changes, said the fund is expected to announce the changes as soon as next month.
An official at GPIF declined to comment on the matter.
We have seen this exact same song and dance in Europe all through 2011 and 2012: Reuters floats a confused, unsourced article, which is actually negative for risk (in Japan the key threat is not stocks, it is bonds, and who will buy them - and there goes another willing buyer), but which trigger covering stops by headline and keyword scanning algos who have the reading comprehension of a Nike shoe. Just as was intended. Of course, the impact of such moves gets less and less with every incremental abuse of vacuum tube stupidity.
There was little else of note in overnight news. From Bloomberg:
- Treasuries gain for a second day as Nikkei falls 5.2%, extending its loss from last week’s high to 13%. JPY strengthened as data showed Japanese investors were net sellers of foreign debt for a second week.
- The BoJ will purchase JGBs about 8 to 10 times a month starting June, compared with the current pace of around 8 times, according to a BOJ statement today in Tokyo
- BoJ Deputy Governor Nakaso, speaking in Tokyo, said it’s critical to maintain trust in Japan’s fiscal situation and he doesn’t expect surge in yields
- Merkel plans to meet France’s Hollande in Paris today as the leaders look for common ground on how to boost the region’s competitiveness, reduce joblessness and jolt Europe out of crisis mode
Euro area economic confidence rose to 89.4 from 88.6 in April, in line with the median estimate in a Bloomberg News survey - Italy sold EU3b of 10Y bonds at 4.14% vs 3.94% at an April 29 auction; bid-to-cover was 1.38 vs 1.42
- Three-quarters of U.S. voters want a special prosecutor to investigate the IRS’s targeting of Tea Party groups, according to a poll that showed a drop in Obama’s approval and trust ratings
- Sovereign yields lower across the board, led by Germany and the U.S. Asian stocks follow Nikkei lower; European stocks gain while U.S. stock index futures decline. WTI crude falls, metals rise
SocGen recaps the main macro catalysts:
European confidence and flash CPI inflation data will again prove secondary today to the main undercurrents in cross asset markets where the bias towards higher core long-term rates has started to take a toll on broader asset classes including stocks and EU periphery debt. The retracement in USD/JPY below 101.20 was key yesterday and selling persisted overnight as the Nikkei dropped another 5.15%. Option structures are offering protection in the 100.50 area but a test of 100.00 cannot be ruled out if stocks continue to fret over higher rates and China data disappoint next week. The reaction of EU periphery yields to the lifting of the Excessive Deficit Procedure imposed on Italy yesterday does not augur well either, and suggests most, if not all, of the good news has been priced in. BTPs did not quite celebrate the EC recommendation and projection that the deficit will fall below 3% of GDP this year - a jump in 10y yields has boosted the spread over bunds to 269bp. This puts the onus for Italian supply on the 2018 and 2023 bonds this morning.
The vulnerability of the US mortgage market has been driving the rates complex higher and in itself this has been one of the main drivers of the wild moves over the last 24 hours as markets discuss the plausible Fed exit scenarios. The sharp drop in prices of MBS securities and the corresponding rise in yield (see chart) has magnified the selling pressure on USTs which are used to hedge against declining MBS prices and falling mortgage prepayments (lower prices means a higher interest rate to attract buyers, but higher rates also mean a higher likelihood of refinancing). The Fed has a total of $1.17trn of agency mortgage-backed securities on its balance sheet, so depending on the format of future tapering (USTs, agencies, or a mix of both?), it must tread carefully to ensure an orderly transition in UST yields and mortgages. Rising US house prices and the pick-up in construction and residential investment have been key components of the economic recovery and the rebound in net household wealth.
Today is likely to be another US-centric day with the release of weekly initial claims and the second estimate of Q1 GDP. The initial claims are not forecast to have changed from last week's 340k, so any deviation from that makes the market susceptible to a meaningful knee-jerk reaction. Continuing claims are forecast to have edged up to 2.956m vs 2.912m. The sale of 7y notes wraps up this week's supply.
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And the full overnight recap from Deutsche Bank:
Since hitting a cyclical high mid-last week, the Nikkei and Topix indices have lost around 10% in local currency terms. The recent JGB selloff has meant that some of the more yield-sensitive parts of the equity market have fared more poorly than others. Case in point is the TOPIX Banks index which is more than 16% lower than its mid-May peak. Similarly, the REIT-heavy TOPIX Real Estate index is down by more than 20%+ since mid-April, crossing into bear-market territory. Both indices are still around 30% higher on a year-to-date basis though.
Dividend stocks are also taking a hit elsewhere in Asia given the recent volatility in UST yields. For instance, the Bloomberg Asia REIT index is down 7th out of the
last 8 trading days and is poised to wrap up its worst monthly performance in more than four years (-12%). The MSCI Asia Telecom index is also down for the second day to a 5-week low. In Hong Kong, the Utility sector is also lower led by Cheung Kong Infrastructure, which is down to its lowest in over 2 months. In Australia, dividend yield sectors such as the REITs and Banks are down 7.5% and 9% since their respective peaks n the last month.
Staying in Asia, 10 year JGBs are trading 3bp firmer overnight (0.89%) and is helping stem some of the recent selloff in Asian EM local rates markets which saw the Philippines 10yr sell off by 71bp yesterday in its 12th biggest one-day spike since 1998. In other EM rates, South Korean and Indonesian 10yrs are both marginally softer this morning.
Briefly recapping yesterday’s session, the underperformance of yield stocks was certainly seen in the US market with higher yielding S&P500 sectors such as telcos (-1.5%), utilities (-1.5%) and consumer goods (-1.7%) bearing the brunt of the selloff. With markets increasingly focussed on the tone of Fed-speak, the usually-dovish Boston Fed President Eric Rosengren maintained yesterday that significant monetary accommodation was still needed. But he also commented that he expected the job market and the economy to be strong enough in a few months' time for the Fed to consider reducing asset purchases by a modest amount. Data-wise it was a relatively mixed day. US mortgage applications fell 8.8% on the previous week with some blaming the result on a rise in the 30yr mortgage rate to a one-yr high of 3.9% which has dampened refinancing demand. In Europe, there was some focus on the stronger than expected Eurozone M3 in April, which rose 3.2% yoy versus estimates of 2.9%. DB’s Mark Wall notes that the headline outcome was predominantly due to base effects while details of the report were softer. Credit to euro area residents contracted in April (-37bn) after showing some strength during the month of March (+59bn). There was continued shortening of bank liabilities with overnight deposits seeing inflows for the twelfth consecutive month (+390bn since last May) while short term deposits and marketable instruments continued to see outflows. Our economists think that the pressure for the ECB-EIB taskforce on SME lending to deliver something non-trivial is building, but they do not expect action for at least a couple of months. In Germany, unemployment increased rose by 21k in May, above market expectations of 5k, and the unemployment rate remained unchanged at 6.9%.
Looking at the day ahead we suspect government bond markets will continue to be the main focus for investors. Given the recent moves in Treasuries, upcoming US data points will clearly be closely followed as in the near term it may affect the speed and quantum of any Fed tapering. On that note, the second reading of the Q1 US GDP, initial jobless claims and pending home sales are the notable releases today. DB’s Joe LaVorgna is expecting today’s first set of revisions to Q1 GDP to show only a modest change to the composition of growth seen last quarter. As a result they are projecting only a slight downward revision in growth to 2.4% from its initial, above-trend print of 2.5%. Initial jobless claims are largely expected to hold steady at 340k while pending home sales are expected to show a strong year-over-year improvement. In Europe, we have the latest economic sentiment survey from the European Commission and French jobseeker data but the US economic/macro picture is the key at the moment.
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