Week End Blog – Short Squeeze Japanese Style

· by · in FINANCIAL MARKETS, MACRO. ·

An authentic short squeeze. That’s what this week’s major JPY move reflects. After years of riding along with the Bank of Japan, things completely reversed. The USDJPY exchanged rate crossed 110, 109 and 108 all within a matter of days. That was both pretty painful and awesome. The USD is down 13% against the JPY since the high in August.

What did not reverse is the strong correlation between Japanese stocks and the JPY. The Nikkei index got hammered, hard! And by the looks of it, probably too hard. Unless the JPY strengthens even more, to below 105, the sell off looks overdone. For now, at least…

The Nikkei was not the only stock market to take a hit. European equities started this quarter pretty ugly as well. In fact, the resemblance with the start of Q1, in which both the Nikkei and Stoxx 50 plunged from the start, is pretty eerie.

Europe has Greece. The IMF is not happy about what the Greek achieved so far. And, by now we all know the drill. A lack of reforms means a lack of willingness from the Eurozone to pay up, which causes Greece to go bust. The chart below says this all at once.

As equities struggle, bond yields continue their, seemingly, endless slide. We are now very, very close to the low of last year. After that something ‘magic’ happened.

Meanwhile, the euro is completely neglecting Mr. Draghi’s bazooka,  and continues to rise in value. The trade weighted euro is up roughly 7% since early December, when the ECB announced the first extension of its QE program. Yes, credibility is on the line here.

But this was already the case, right? I do realize that it is expected inflation that counts, but has core CPI really been that horrible to warrant such massive QE? I wonder…

Unprecedented QE translates into bond madness. There’s nothing new about that. But it doesn’t hurt to picture this once in a while. 30-year bond yields are just incredibly low.

If you think that’s pretty amazing, check out the graph below. The Swiss government has a bond outstanding with a maturity of 50 years. The effective yield on that bond is… 25 basis points. Yes, that’s right, you can now lend the Swiss government money for a period of 50 years and get just 0.25% p.a. in return.

Let’s move over to the US where bond yields look less crazy. First quarter growth, however, looks dismal. This should not come as a surprise since US GDP grew just 0.2% (annualized) in Q1 during the last 10 years. But since the Atlanta Fed promised us much better growth numbers earlier on, this feels disappointing.

This is, of course, nothing compared to Venezuela, which is basically falling apart. Economic woes, but especially hyperinflation has put the country on top of the misery leader board. When it comes to misery Venezuela is in a league of its own.

Fortunately, every cloud has its ‘silver lining.’ In order to reduce electricity consumption, the Venezuelan government has announced that, in April and May, every Friday is a non-working HOLIDAY.

Thank you for reading the Week End blog! Enjoy your weekend!

 

 

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