Japan Is Rallying After The Jobs Report

The Japanese stock market has been tanking since May 22.

In the past few days, losses have slowed a bit – Friday, it closed down only 0.2%.

However, we witnessed a big unwind in the long U.S. dollar/short Japanese yen trade yesterday, with the currency pair falling below ¥95.54 overnight from levels around ¥99.46 just a day before.

Following the release of today's jobs report in the U.S. – which came in better than expected – the dollar initially tanked against the yen, making a new low of ¥94.98.

However, the losses were short-lived, and the dollar is now trading around ¥96.85 to the yen versus levels around ¥95.66 just prior to the release.

Meanwhile, Nikkei futures are spiking and are now up 0.3% from the previous close after being down prior to the report.

Click here for all the details of today's jobs release >

Please follow Money Game on Twitter and Facebook.
Follow Matthew Boesler on Twitter. Tags: Japan, Yen | Get Alerts for these topics »

To embed this post, copy the code below and paste into your website or blog.

View the original article here

Yesterday's Huge Chinese Interest Rate Spike Has People Freaked Out About A Looming Credit Crisis (FXI, EWH)

Chinese interbank rates surged ahead of the three-day Dragon Boat festival next week. 

The overnight Shibor, or the Shanghai interbank offered rate, surged to 8.29% on June 7, from 5.98% on June 6. The seven-day Shibor rose to 6.66%, from 5.14%.

This is an interest rate used among banks, and it's considered a useful proxy for liquidity in the Chinese credit markets.

What could have caused the spike in Shibor?

First, Demand for cash rises ahead of Chinese holidays like the Dragon-boat festival, New Year holiday, Golden week holiday.

Second, Bank of America's Ting Lu doesn't think this doesn't suggest major problems with the financial system. "In our view, most likely the PBoC failed to anticipate and then failed to respond swiftly to a sudden fall of liquidity supply and seasonal rise of liquidity demand," he writes.

Third, Lu argues that interbank liquidity was squeezed on account of a decline in speculative activities after the government tightened FX curbs. He also cites two other key reasons.

Fourth, one off demand for U.S. dollar, because of State Administration of Foreign Exchange (SAFE's) regulations on foreign exchange inflows and banks’ Forex position management.

Fifth, it could be because of the crackdown on illegal bond trading. " But because it’s not banned for the banks to trade bond between its different accounts, banks may have to find trade counterparties in the interbank market and frictions could arise resulting in rate volatilities."

Lombard Street Research

What are the implications?

Diana Choyleva at Lombard Street Research thinks this is symptomatic of a bigger problem.

She argues that China's current account surplus fell to 2.6% of GDP in 2012, down from 10% in 2007 and that "this means that capital flows have become a more important driver of domestic liquidity conditions in China’s managed exchange rate system." In fact, she expects China to see more capital outflows than inflows.

If Beijing decides to go for another stimulus, which analysts say is highly unlikely, Choyleva writes that the economy will see "inflation and bubbles rather than sustainable growth" and this could cause capital and current account outflows. 

And if it tries to ease capital controls further and opens up the capital account fully, "outflows in search of higher return amid weaker and more volatile Chinese growth are likely to outweigh inflows."

Bank of America's Ting Lu however doesn't think that this Shibor spike and liquidity squeeze doesn't suggest major problems with the financial system. "In our view, most likely the PBoC failed to anticipate and then failed to respond swiftly to a sudden fall of liquidity supply and seasonal rise of liquidity demand," he writes.

The central bank injected 160 billion yuan into the system this week but he thinks it is unlikely that they will continue multiple open market operations to inject liquidity next week if the Shibor stays high.

Lu and Choyleva also differ on how the central bank might react. Lu doesn't think reserve requirement ratio cuts are likely, because they don't want to "send policy easing signals." Choyleva thinks liquidity pressures could well force their hand. She also thinks they could raise deposit rates.

Societe Generale's Wei Yao has already warned that China is approaching it's Minsky moment.

While some argue that the government controls the state-owned banks and could intervene in case of severe stress, she does think, "the emergence of such stress tells us a lot about the state of the economy and the banks and the likely outcomes for asset markets.

View the original article here

George Soros Is Going Back Into Japanese Stocks

REUTERS/Yuri Gripas

After selling off a load of his position in Japanese equities last month, George Soros is buying them up again, the WSJ reports.

Unless you've been under a rock for the past few weeks, you noticed the serious selloff in Japanese stocks. The Nikkei has lost 21% since its intraday peak on May 23rd and now the Abe government is pushing for Japan's institutional investors to jump back in the action.

Soros' money will definitely help Abe out. The hedge fund manager runs $24 billion of his own money and made $1 billion from positions in the Japanese yen and Japanese stocks earlier this year.

A person familiar with the situation told WSJ that Soros is buying up everything from big blue chip Japanese companies to mid-cap growth stocks.

So consider that.

Please follow Clusterstock on Twitter and Facebook.
Follow Linette Lopez on Twitter.
Ask Linette A Question » Tags: George Soros, Japan, Stocks, Nikkei | Get Alerts for these topics »

To embed this post, copy the code below and paste into your website or blog.

View the original article here

Portfolio Managers Are Asking Themselves One Question After Recent Trading

FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors.

The One Question Portfolio Managers Are Asking Themselves After Recent Trading (Dow Theory Forecasts)

From Richard Moroney: "If a mere one-half percentage point increase in bond yields can have so much impact — halting the broad stock market’s advance and triggering considerable tumult in high-yield stocks and aggressive bonds — what’s going to happen when yields return to more normalized levels?

That is what a lot of portfolio managers are asking themselves after the last few weeks of trading, which have seen a rotation out of defensive dividend payers morph into a broader decline. Shares of companies highly sensitive to interest rates, including homebuilders and real estate investment trusts, have been hit especially hard. But most stocks have moved lower since May 22, when the advance-decline line for S&P 1500 stocks peaked."

One Wall Street Ritual Hasn't Changed In Decades (ConvergEx Group)

Wall Street has changed a lot in the last few decades writes Nick Colas,  chief market strategist at ConvergEx Group, but "one ritual" has stayed the same. After meeting with sector analysts and strategists early in the day, salespeople get on the phone with clients about the firm's investment viewpoint. 

"The reality is somewhat sloppier.  Analysts give their perspectives, yes, on the investment merits of the public companies under their coverage.  But the most likely question from the sales staff is either “Why isn’t everything you just said already in the stock?” or “What are the 24 words I can say on the off chance I actually get a client on the phone?”  And every salesperson serves accounts with a wide variety of investment perspectives.  What the guy covering hedge funds needs from an analyst call is very different from the gal covering long-only mutual funds.

"As a result, the same analyst morning call gets transmitted in very different ways.  It might start as an upbeat reiteration of a “Buy” recommendation with some color about the current quarter that the analyst believes will be a penny below consensus.  The hedgie salesman will call every account saying “My guy/gal says that this company is going to miss.  Short the stock.”   The mutual fund saleswoman will go out with “Gotta buy this name if/when it pukes on the quarter.”  Old school Wall Street salespeople call this a “New York sell, Boston buy” call."

The State Of The Four Official Recession Indicators (Advisor Perspectives)

NBER Business Cycle Dating Committee looks closely at four indicators industrial production, real personal income, nonfarm employment, and real retail sales. Doug Short of Advisor Perspectives pulls each of the indicators into separate charts to see the decline in each indicator since 2006.

Advisor Perspectives

Small Advisory Firm Needs To Hire More People To Manage Client's Powerball Winnings (Investment News)

Madden Advisory Services, the investment advisor that calls Gloria Mackenzie a client, is a four-person firm with about $203 million in assets. Investment News reports that it could see its assets under management double since McKenzie won the $590 million Powerball Lottery. She was left with $270 million after taxes. Harry Madden who founded Madden Advisory said that they would be hiring more staff and space to meet the Powerball winner's needs.

Investing In International Bond Funds Could Be A 'Double-Edged Sword' (The Wall Street Journal)

The Vanguard Group has forayed into global bond funds, and this could prompt mainstream investors to venture into global debt as well. But advisors are telling the Wall Street Journal that this could be a "double-edged sword."

While overseas debt might be more attractive for investors chasing yield, Greg Peterson, research director at Ballentine Partners told the WSJ that they will also have to take on a lot more risk. This is because of differences in law, current account balances, volatility in Forex markets that could all impact foreign bond funds. While some think the extra yield makes up for the risks, others think investors should be cautious, especially if central banks start reducing their quantitative easing programs.

View the original article here

All Signs Suggest This Is The End Of The Stock Market Rally

The recent return of high volatility to the stock market, bond market and currencies suggest the end of the rally that started in November and probably to the upsurge since the March 2009 bottom.  As we stated in last week’s comment the market now appears to be entering a lose-lose situation where economic growth is bad since it forces the Fed to “taper’ its bond buying program, a move that investors, as they have most emphatically demonstrated this week, do not like one bit.  On the other hand, if the economy continues its tepid pace (or worse), as we think it will, employment won’t meet the Fed’s goals and earnings will take a dive.  In the latter case, the Fed would likely delay tapering of its bond-buying program and investors will interpret bad news on the economy for what it is----bad news.

In comments over the last two months we have shown how various important sectors of the economy have either been slowing down or failing to meet expectations, a condition that has indicated no signs of reversing.  The four-week moving average of new weekly unemployment claims has moved from 338,000 to 353,000 over the past month.  The ADP employment report for May came in far under expectations, and has averaged 124,000 over the last two months compared to 203,000 over the prior five.  The majority of Fed regional surveys have showed weaker hiring in May than in April.  The National Federation of Independent Businesses (NFIB) recently reported reduced hiring in May. 

The ISM manufacturing index of 49 for May was the lowest since June 2009, when the recovery was only getting underway.  That number was even worse than it looked since new orders plunged 3.5 points while inventories rose.  The ISM non-manufacturing index for May was down from a year earlier, and has not recorded a monthly increase since December.  Moreover, its employment index component dropped from 52 to 50.1, its fourth consecutive decline. Consumer expenditures for April declined 0.2% and disposable income 0.1%.  Compared to a year-earlier, real consumer spending is up a paltry 2.1% and real disposable income only 1%.  Even then, consumers were able to maintain this inadequate rate of spending only by reducing their savings rate to 2.5%.  Notably, the savings rate was under 3% in each of the first four months of the year, whereas prior to this year the rate had not been under 3% for any month since December 2007, the peak of the economic cycle.

Real GDP has increased only 1.8% over the last four reported quarters, within a range that has been in force since the first quarter of 2010.  The current quarter is shaping up as no better.  Manufacturing production has declined for the last two months and three of the last four.  Even vehicle sales, which recovered strongly from the recession bottom, have now flattened out for the last six months.  The Chicago Fed national activity index, which covers a broad swath of the economy, showed deterioration in growth in April, and has been negative in three of last four months.

Although there is a lot of talk about a stronger economic recovery, the facts, as outlined above, indicate otherwise.  Furthermore, the effects of the sequester, which started very slowly, are starting to become more evident in slowing wage growth and reduced hours.  The original estimates of a 1.5% drag in GDP growth from the tax increase and sequester still appear to be valid and will likely be felt in the 2nd and 3rd quarters.  We therefore think that the overly optimistic earnings forecasts for the rest of year will be highly disappointing.  Although 1st quarter earnings slightly beat the consensus, revenues were flat, and corporations will find it exceedingly difficult to increase earnings with no help from revenues, which are likely to remain under pressure.

In addition, global growth is slowing with much of Europe in recession, China coming in short of expectations and emerging markets weakening.  We have continually pointed out that following a huge buildup of consumer debt it would be difficult to generate a normal recovery in either the U.S. or the rest of the world, and there is little that governments can do other than to choose between undergoing a major crisis or to endure prolonged sluggish growth.  Four years after the recession bottom, we see no reason to change this view.

View the original article here