Wow, the volatility these days, especially during the US opening hours!
The Nikkei 225 futures rallied almost 2% since their Tokyo close, fuelled by a yen drop of 1% largely off the back of good US employment data plus decent earnings from US corporates. Similarly, the euro took a tumble. The Hang Seng futures closed at about 0.5% up in the HK evening session, suggesting a pretty forceful move up tomorrow of around 0.7-0.8% at opening from global peers alone. Both the Nikkei 225 and S&P500 receded by roughly 0.5% from the top note in a rather quick 15-20 minutes of trading, but currencies have since stabilized near their corresponding time peak levels for both indices.
Perhaps of the most interesting developments today was that Japanese government notes for 3 months sold at a negative yield! Pay the government to hold your money for you!
Now, I would really want to know, is this because of too much cash in the system overall and needing to park it short-term somewhere, or because money managers don’t really dare put it elsewhere with this buzz-saw of volatility killing anything that isn’t a day position, or because the idea that there simply isn’t anywhere, long-term, for people to put money with decent risk-reward metrics in Japan? This news hitting the wires seems to have been the starting round for a lot of yen weakness, implying that the market a) believes that there is a lot of cash around, and that b) this cash will probably increase Japanese inflation further or c) this cash will flee the country to gain carry, so on the above it seems like the first option of “too much cash” is correct. In the last two-three days, the yen has fallen about 2% against the US dollar, and if the “too much money, it will cause inflation or outflows” thesis is correct, then another 1.6% drop in the yen – putting it below 1/110 against the US$ again – would be really interesting in terms of cascade effects!
Also, there was another yay-good-data-d’oh-no-stimulus! moment out of China yesterday with the HSBC / MarkIt flash PMI. It came in at 50.4 vs. expectations of 50.2, and still showed a lot of restraint due to I/O prices falling. There is thus little inflation in the country and there is room for stimulus. However, keeping up with the “I don’t believe in broad stimulus” tack that I’ve been keeping here at S3 for a while, if you can target specific banks for easing and keep profligate lending in check, low inflation has a number of benefits:
- Real personal savings are being built on and allows greater personal financial flexibility.
- The whip is kept on banks and financial institutions with big loan books to actually manage themselves better.
- The housing market becomes a lot less attractive as a long-term investment, allowing money to be placed elsewhere and giving first-time buyers a chance to enter the market.
- Physical investments / CapEx / inventory isn’t nearly as important and it does therefore allow corporates a better position to restructure and invest in “soft” capital.
- Effective requirements of yield for investment funds for insurance and pensions will be considerably lower, allowing better potential for these funds to get a head-start if subdued inflation is prolonged in the medium term.
If this is the analysis done at the Zhongnanhai, then I hope that the reforms are strong enough to social security, pension funds and other investment vehicles that the likely damper on consumer demand that lowered inflation would imply is balanced by freeing up more money that doesn’t need to be in a rainy-day fund, and thus balances up lack of demand-driven inflation with an increase in Chinese velocity of money.