After a relatively calm start for financial markets yesterday, volatility is back again with attention continuing to shift more squarely on the deteriorating global bond market. Treasuries and emerging market bonds have been quietly selling off over the last few weeks, but the purge is accelerating today. The ongoing concerns over Fed tapering set the global bond sell-off in motion, but volatility today is largely being driven by an underwhelming Bank of Japan meeting overnight, as well as the uncertainly around the German constitutional court considering the legality of the ECB’s pledge last year to buy government bonds of weaker euro-zone countries.
The bulls believe that higher rates signal better growth which is good for stocks, but this is clearly not playing out today as the yen-carry trade is getting flipped on its head again. After levering up on Friday after the better-than-expected jobs report, traders are getting caught off guard after many currency strategists called for dramatic Yen weakening, with some calls for 150 Yen to the dollar (~another 50% devaluation). However, with the Bank of Japan offering no new stimulus last night, the yen carry unwind in back on resulting in today’s global stock/bond sell-off.
As of 10:35AM, the S&P 500 is off 0.7% to 1,631, with the VIX (Volatility index) up over 8%. Asian markets were lower in overnight trading with the Nikkei down 1.45%. Europe is down sharply with Italy down nearly 2%. Spain is down 2.7%. France is down 1.9%, and Germany is down 1.7%.
Areas Of Focus Today:
Bank Of Japan Disappoints/Yen Strengthens – The Bank of Japan failed to take any measures to address a month of volatility in bond markets. Instead it is sticking with a plan to double its monetary base and help re-stimulate the economy. The plan to double the monetary base was expected to cause yields to fall and bond prices to appreciate, but has done the opposite. The decision last night not to “expand” its buying of ETFs and similar “risk assets” in an attempt to quell the markets and weaken the currency was met with immediate and dramatic strengthening of the yen by over 2% (the currency’s biggest surge in over three years). The yen has had volatile daily moves of 2-3% the past 4 sessions (which in the context of stocks would be equivalent to roughly 20%+ a day moves).
German Constitutional Court Hearings – Attention in Europe has turned to the German constitutional court’s hearings on the ECB’s OMT program, which will be attended by the Bundesbank’s Jens Weiddman and the ECB’s Joerg Asmussen. The two-day hearing begins today. The question is whether Germany will consider the ECB’s Outright Monetary Transactions (OMT) program constitutional, given that the country is attempting to limit its potential commitment in the event OMT is activated. Although the German position has been known for a long time, any move to block the process could prompt tension on peripheral yields.
Bond Market Volatility – Bond yields are up huge everyone this morning as investors are dumping sovereign debt. In the United States, the 10-year yield is up 6 basis points to 2.26%, its highest level in over a year (up around 16bps from Friday’s low yields). The Japanese 10-year yield is up 5 basis points to 0.88%. In the eurozone, rising German bund yields prompted accelerated losses for government bonds around the periphery. Yields on Spanish and Italian debt rose to their highest in six weeks.
Fed Reaction – Bernanke’s press conference next Wed 6/19 will incredibly important, as investors look for direction on tapering. Yesterday, we had dovish comments from St Louis Fed president James Bullard who said that he would support the continuation of QE in its current form if inflation remains below the Fed’s 2% target. Bullard said he wants “to see some reassurance” from inflation data “before we start to taper”. Today’s weak job-openings data (April job openings falling to 3.76M vs 3.88M in March)will likely draw the most attention by Fed Vice Chair Janet Yellen (widely expected to replace Bernanke), as she’s said it’s one of the indicators she’s watching for signs of improvement in the labor market.
Commodities Under Pressure – There are few places to hide today as commodities are getting hit, too. WTI crude oil is down 1.3%, while Brent crude is down 1.5%, and NYMEX gasoline is down 1.3%, gold is 1.2% lower, silver is down 1.5%, and platinum is down 1.3%. Agricultural commodities are all in the red with the exception of corn and soybeans, which are both flat.