The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Feeling fine
Rumors of a Yen intervention began Friday and continued over the weekend. The Yen strengthened 2.8% over the two sessions, a huge amount. Additionally the Nikkei fell 1.8% overnight and the Japanese bond market, which has been selling off for more than a year, is threatening an ugly unraveling. The larger point being that Japan is potentially a bearish catalyst in-the-making. So far, US markets are unfazed. S&P 500 futures were down substantially last night but recovered to flat by 4 AM. The index opened about +10 and added 20 more points early, adding another 10 in the afternoon. The rally was steady and broad and US investors are talking about earnings season, not Japan. The Treasury curve came in small today and US capital flow was 102%.
Japan is the issue that isn’t concerning, yet. It is not clear but *perhaps* the rally in US treasuries and US stocks represents a flight towards US capital markets away from Japan. If Japan remains worrying, perhaps US markets benefit. However, if Japanese markets actually collapse, the US reaction will not be bullish, we will succumb to a huge risk-off impulse. The rest of the world will do the same.
Unfortunately, the Japanese risk to our market won’t be felt until it’s too late. Investors are acting as though whatever problems Japanese markets are facing, they are solely Japan’s problems and they won’t spill over. That’s certainly true if the problems remain small. If there is a serious market dislocation over there, likely in their bond market, the contagion probability is 100%. Japan is too big and too interconnected.
Hopefully I am just being a nervous Nellie but their 40-year bond yield exceeded 4% last week, a record. Their entire yield curve is 40 to 155 bips higher than a year ago. Their currency has weakened steadily since April, almost 12% until the Yen intervention rumors started. When a country’s yields keep climbing and their currency keeps weakening and their central bank intervenes in their currency, that’s a bad fact pattern. If you are a student of emerging markets, that’s the pattern before a capital markets crisis. The question is, will capital flee Japan as though it were an emerging market or can the Bank of Japan and the Fed and maybe the European Central Bank hold back the market and then reverse investor perceptions?
I hope we don’t have to find out. Until something in Japan actually spills over, our stocks are hunky-dory and looking forward to new highs, just 36 S&P points away.
See you tomorrow.
-Mike
Visdom Market Commentary
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