Just when you think it’s safe to dip back into forex markets, the Japanese bond shock returns. At least this time, it is yields, not currency.
Helped by the dovish Fed.
AUD can’t rise while Japan threatens bond meltdown.
CNY remains supportive.
Gold senses something is amiss.
Metals mania continues.
Miners firmed.
EM is stalled.
Junk suddenly appears threatening.
As Japan jackknifes global yields.
Stalling stocks.
Albert Edwards at Societe Generale has been on the Japan story ahead of most.
1. BoJ is still doing QE, but bond run-off more than offsets it — meaning net QT has already begun, and the balance sheet is shrinking with deeper QT planned.
2. As the BoJ reduces its JGB holdings, 10y yields are drifting toward their theoretical level (~2%), with risk of moving even higher as fiscal deficits worsen.
3. Eventually, fiscal dominance will force the BoJ back into QE/YCC, as will likely occur in the US and Europe — but not before something breaks.
4. On this path, real and levered money may stop flowing out of Japan (or even reverse), and with the S&P sitting at a stretched 23x forward EPS, the vulnerability is obvious.
The ten-year yield probably has further to run, but it’s the speed that kills and it is moving fast.
It is some reassurance that JPY has decoupled. But how long has that got if DXY begins to rise on risk-off money flows?
There is also the risk that Japanese yields drag up the US long end at precisely the wrong moment, exacerbating the above dynamics.
Once again, AUD will be held back rather than ride the globla recoveyr wave.
