News & Views: Friday, October 31
What you need to know for today's trading day.
Eurozone inflation edges up to 0.4% (BBC)
Yen Slides as Stocks Slide With U.S. Futures Surge on BOJ (Bloomberg)
Russia Raises Rate More Than Expected to 9.5% on Ruble (Bloomberg)
Kuroda's Easing in Japan Seen Adding to Pressure on Korea's Lee (Bloomberg)
RBS takes $640 million forex charge and warns of more to come (Reuters)
The BoJ moved last night to increase its QQE program to 80 trillion Yen per year from 60-70 trillion currently. Firstly, they are extending the maturity on their JGB purchases to 7-10 years from 4-7 currently, and they are aiming to get 80 trillion in government bonds. They say "aim" because they are having a hard time finding enough supply, and their monthly purchases will be 8-12 trillion, which means they may end up increasing it by more than the 80 trillion expected if they hit their goals. Secondly, it is tripling its purchases of risk assets. It will purchase now 3trln Yen of ETF's, 90bln of J-REIT's. It also opened up ETF's that track the Nikkei 400 for purchase.
Shortly thereafter, the $1.24trln Japanese Government Pension Investment Fund (GPIF), which was worth about $25bln more yesterday in USD terms, announced that it was cutting its local government bond holdings (JGB) to 35% from 60%, more than the 20% cut that had been expected previously. That will be evenly split between local and foreign stocks, which will now have 25% weightings each. If you're into tin-foil hat theories, the increase in the BoJ's government bond purchases is roughly equivalent with the drop by the GPIF. Its also important to keep in mind for the matter of perspective that the second largest sovereign pension fund - Norway - already has allocations similar to the GPIF's new plan, it had been positioned for continued deflation previously. That is NOT the case for much of the US.
Unsurprisingly, the USDJPY and Nikkei are showing the largest positive risk-adjusted return across all assets overnight.
Also, overnight is the Bank of Korea, which has to "do something" to offset the massive jump in the KRWJPY. The South Korean government stands ready to ease market volatility, probably through active currency intervention, according to the country's Finance Minister. Add South Korea to the list of active currency interveners. The Russian Central Bank hiked rates by 150bps as was generally expected, but did not make any comment on letting the currency free float, which is what many had expected (and was the root cause of yesterday's rally in the Ruble). The Ruble basket's 1.49% decline overnight (a little more than 3 sigma) is giving the move in the Yen a run for its money.
Gold is showing the largest risk-adjusted return in commodities, which will probably make dedicated gold bugs unhappy this morning considering the move by the BoJ.
Interestingly, US Treasuries are showing the largest negative risk-adjusted return across all assets overnight. This is coming alongside lower real rates (ALL TIP rates are flat or up today). My sense is that this weakness in Treasuries reverses itself today, or TIPS selloff. My vote is in the latter camp. The BoJ just said it was exporting even MORE deflation.
Overall, I don't think the correlations we're seeing in the market today will carry over for more than a few days. A deflationary pulse in the US (higher dollar, lower commodities, flatter curve and higher nominal rates/lower real rates) cannot long-term push risk assets higher, and keep rates rising. After all, humans create the correlations, right?
- Japan national CPI YoY (Sep) down to 3.2% vs 3.3% expected, prior 3.3%
- Japan Tokyo CPI YoY (Oct) down to 2.5% vs 2.7% exp, prior 2.8%
- Japan jobless rate (Sep) up to 3.6% vs 3.6% exp, prior 3.5%
- Eurozone advance CPI YoY (Oct) up to 0.4% vs 0.4% exp, prior 0.3%
- Eurozone core CPI YoY (Oct) down to 0.7% vs 0.8% exp, prior 0.8%
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