When I said that it was BoJ day yesterday not for a minute did I think that their decision, which I expected, to leave things as they are, would ignite the kind of growing mess we saw overnight and a growing instability that threatens to becoming all enveloping.
But with the Nikkei and Asian stock sell off, with the Indian Rupee at all time lows and the Sensex under pressure and with the Bank Indonesia raising rates last night to try to support the Rupiah as it headed up and through 10,000 it is hard not to be worried that markets are getting close to a dangerous phase of instability.
Now I have been on this Minskyesq stability breeds instability for a little while now, maybe 6-8 weeks, and I have also mentioned that Mandlebrot tells us that volatility clusters so my warning lights are flashing amber at the very least with short bursts of red.
I don’t know what defcon we are at but it’s a bad one.
The key for me is that the Fed’s talk of taper and the BoJ’s steady hand yesterday simply reinforce the fact that markets are on life support kept alive by the drugs supplied them by central bankers.
But if you want a clear signal that last night’s moves were about fear then the emerging market and bond selloff is not the only pointer because we also saw commodity prices fall on a weaker US dollar. This could get ugly.
The BoJ’s actions yesterday which are entirely consistent with their overall plans but, and I know this is a crude analogy, like a junkie building up a tolerance to heroin the market just needs more and more and more of a hit to sustain itself. So the Nikkei was off 1.45%, the Hang Seng fell 1.20%, Shanghai was 1.39% and the Sensex in India was 1.53% lower.
This set a bad tone for Europe but so too did the unedifying spectacle of Joerg Asmussen arguing for the ECB’s OMT bond program which helped stabilise yields in the EU last year against his colleague on the ECB Board and doctrinaire Bundesbank President Jens Weidmann who was arguing against it in a German court overnight.
At the close the FTSE was down 0.94%, the DAX was 1.03% lower, CAC was down 1.38% while the periphery – reflecting increased risk aversion – of Spain and Italy were down 1.63% and 1.68% respectively.
In the US the S&P 500 traded down to 1623, up to 1640 and then closed at 1626 for a loss of 17 points or 1.02%. The Dow closed down 117 points or 0.77% and the Nasdaq was 1.06% lower.
Could the increased volatility stop the Fed from signalling a taper next week? Of course but equally the Fed might be about to stage its very own central banker style intervention for the junkie that markets have become.
For the Aussie it has been a huge 24 hours with a test and rejection of my 93.77 level initially with a low at 80 before a solid 60 point rally which saw sellers come in and hit the Aussie hard. I had a short term trade on the way up for a recovery with a stop at 77 but that was taken out for a 35 point loss as the Aussie fell to a low of 0.9324 before recovering with the broad based US dollar weakness to sit at 0.9435 as I write this morning.
Thankfully my process suggested USDJPY was going to fall as I noted yesterday morning and I was short USDJPY for 100 odd points once the previous days low went so it ended up a good day all things considered.
I have targeted a move below 94 cents for a while now, or at least a test of support at this level, as a signal of the Aussie dollar long term outlook and I believe that even though a recovery of some sort is likely in the days ahead the very long term charts are warning of a cascading cliff – think waterfall – that the Aussie may fall off in the month/months ahead.
For the moment though yesterday’s sell off and rebound could be a good place from which the Aussie can recover – but remember it’s still a bear market and I can not see a situation where the instability is spreading to emerging markets in the manner is which is good for the Aussie. I’m going to buy some 3 month puts.
Given the BoJ was the catalyst for, or at least got the blame, for the stock shenanigans its no surprise that the USDJPY was the big mover overnight trading down from 99.04 yesterday morning to 96.03 as I write. Yesterday I wrote in the wake of the rally and as a result both of my fundamental and technical view said:
It would be my proposition that while below the 99.90/100 level USDJPY has more downside ahead of it.
Which is what we have seen as you can see in the chart below.
We now have a big old range range between 99 and last weeks low at 94.93 a break of which would open a move down toward 92.37.
The euro was higher taking out the previous high we talked about yesterday and the single currency strangely looks good techncially sitting at 1.3313 this morning – but I am not playing because I don’t trust it and know that I can’t separate my rhetoric from this pair so best I take it out of the quiver. Sterling also did better but not quite so technically and sits at 1.5646 up 0.48% to the Euro’s 0.43%. In a sign that these moves were about the US dollar the USDCHF rate is down 0.93% at 0.9244
Commodities
As noted in the recap “global” commodities fell even though the US dollar was weaker which I take as a sure sign that things are getting messy in markets which are starting to correlate to one as they do when fear rises.
Nymex crude fell 0.90%, gold was 0.66% lower, silver down 1.26%and Dr Copper down 1.42%. The more specific commodities of the American mid-west however recovered the losses of the previous night with corn up 1.23%m wheat up 0.93% and soybeans up a whopping 1.87%
Data
Electronic retail sales in NZ, Machinery orders in Japan and Westpac Consumer confidence in Australia and then the Japanese Economic indicator.
In Europe it is a bunch of CPI’s together with French and UK unemployment and EU IP and the BoE quarterly bulletin. In the US it is another quiet night on the data front.
Twitter: Greg McKenna