Ok so first of all, stocks rose – again – and get ready, because I’m about to throw the kitchen sink at you in terms of rapid-fire, around-the-world analysis.
The first thing you need to understand is that the S&P has already run out ahead of multiple analysts’ year-end targets and it is entirely possible that it will blow through the rest in relatively short order. Here’s a sample:
“Fuck yo’ target”…
Stocks closed at new record highs. So there’s that.
But you need to try and extricate yourself from your stock bubble (and “bubble” can be taken both figuratively and literally there), because bonds were the story on Tuesday.
Specifically, 10-year yields rose to their highest in 9-months:
It started overnight with this headline:
- BOJ CUTS 10-25 YR JGB BUYS TO 190B YEN; 200B YEN IN LAST OP.
As a reminder, this isn’t the first time they’ve cut purchases, but as FX Prime by GMO’s Hiroshi Yanagisawa put it, “amid a lack of fresh factors” this was notable for the yen and while “FX markets had not paid attention to BOJ last year, there may be some expectations that the situation may be changing a bit this year.” In other words, folks are starting to wonder if the BoJ is going to start moving to unwind accommodation. Here’s what happened to USDJPY when that hit:
If that looks like an exaggerated move to you, that’s because it probably is. What the above-mentioned Hiroshi Yanagisawa means by “amid a lack of fresh factors” is basically that in the absence of something else to trade on, the market seized on that.
“The timing was a bit of a surprise but given that the 30-40- year curve was flattening with buying last month, today’s action is a message that the BOJ will cut buying when the super-long yield curve flattens,” BofAML said.
Now you’d think that (yen strength) would have weighed on the Nikkei, but thankfully for those riding the Japanese stock rally to 26-year-highs, the correlation has broken down:
Ok, so between the BoJ news and lots of supply coming online (from the U.S., the U.K., Japan and Germany, not to mention IG which will add $14.65b in total pricing to the glut) bonds sold off and the 2s10s steepened by the most in a year:
Bill Gross is going to go ahead and call it:
Gross: Bond bear market confirmed today. 25 year long-term trendlines broken in 5yr and 10yr maturity Treasuries.
— Janus Henderson U.S. (@JHIAdvisorsUS) January 9, 2018
Rising yields helped the dollar to its second straight day of gains, a welcome reprieve for the greenback after posting its third straight week of losses last week:
But the big story in FX land on Tuesday was of course the PBoC’s move to sideline the counter-cyclical adjustment factor. This is important and we detailed it extensively on Tuesday morning here. The offshore yuan fell the most since September following the news:
Here’s an annotated chart that shows you the evolution of the PBoC’s FX management efforts over the last nine months:
Needless to say, EM FX felt the heat from the yuan decline and from the dollar strength with 22 out of the 24 EM currencies Bloomberg tracks falling. EM equities put the brakes on a multi-session rally while the Cboe EM ETF volatility index put up back-to-back increases:
Crude surged more than 2% to a three-year high:
Oh, and junk spreads are at their 2007 lows because you know, what could go wrong?…
Finally, for your moment of zen, we go to Sarah Huckabee Sanders…
Q: "Has the president abandoned the idea of Mexico paying for the wall?"
Sarah Huckabee Sanders: "No, he hasn't." pic.twitter.com/G85RvOomcX
— MSNBC (@MSNBC) January 9, 2018