Germany and Japan

Two countries with over $9T of global GDP, it’s hard to believe both are sitting with bond yields below zero.  Today, the German 10 year yield crossed Japan’s at a whopping -0.09%.

Investors globally are starting to worry about a taper tantrum in Japan.

In May 2013, after a soft suggestion of a pull back in government bond purchases by then-Fed Chairman Ben Bernanke, panic spread in the market, leading the 10-year Treasury yield surged 140 basis points (1.40%) in just four months.  This week, as Japan launched a colossal $274B fiscal stimulus plan, many worry that their asset purchase (government bond buying) gravy train has come to an end.

As we’ve stressed to subscribers, a surge in bond yields back to 2011 levels would equate to nearly $4T in bond losses to investors world wide.

Implications? Pick up our latest report here:

*BOE CUTS RATE TO 0.25%, EXPANDS QE BY GBP60B, BUYS CORP. BONDS (these corporate bond buys by the BOE are aggressive, surprised the street)

*BOE: MAJORITY OF MPC EXPECT RATE CUT TO NEAR ZERO BY YR END

*BOE VOTES 9-0 TO CUT RATE, SPLITS ON QE, CORPORATE-BOND PLAN

*POUND EXTENDS DROP VERSUS DOLLAR, FALLS 1.1% TO $1.3169

The Bank of England has slashed interest rates for the first time in more than seven years and delivered an emergency package worth up to £170 billion to ward off recession following the Brexit vote.

Our central banking Gods voted unanimously to cut rates to a new historic low of 0.25% from 0.5% – the first cut since March 2009, when the Bank reduced rates at the height of the financial crisis.

Cause: the Pound is off 11% since the Brexit drama hit markets.  Effect: inflation risk over the next 12 months is high and presents challenges to Mark Carney and the Bank of England.  The BOE does not have that many bullets left in the gun in terms of rate cuts with rising inflation risk.  Globalization has brought inflation sharply lower in recent years.  On the other hand, as the UK pulls back from the global economy through Brexit, this presents higher inflation risk over the next 12 months and is a heavy short term motivator behind the BOE today.

We believe markets are transitioning from “high” back to “low” in terms of the market’s faith in central bankers.  On February 10th with the S&P 500 at 1810 confidence stood at the lowest level in years.  Each day the “beast inside the market” wants more and more and the bar is more and more elevated.  This presents near term challenges for U.S. equities.  Pick up our latest report below:

The head of Venezuela’s electoral authority (CNE), Luis Emilio Rondon, stated this afternoon that the alleged irregularities in the opposition’s collection of signatures to initiate the referendum process will not delay the proceedings.

Venny bonds have been on the rise as a positive, market friepolitical

Pick up our latest report here:

This surprise announcement contradicts statements by regime hardliners like Diosdado Cabello that the alleged infractions mark an historic act of fraud and will prevent the referendum from advancing.

The mixed messages reflect the chaotic state of Venezuela’s leadership. If Rondon’s comments are sincere, they highlight the power struggle emerging between governing factions. In the days to come, it will be important to examine the response to the government rift by the institutional military led by General Padrino Lopez and elements within the National Guard and the armed “coletivos” supportive of using all means necessary to keep the Bolivarian Revolution alive. Regardless, Maduro is losing control of the situation and change at the top is likely.

Pick up our latest report here:

Low Volatility and the Election 2016 Doesn’t Add Up

A VIX below 13 within 100 days of a two term Presidential election is highly unusual.

Pick up our latest report here:

As we stressed late last year,  there’s a powerful historical financial precedent supporting higher market volatility in Q3 of a two term election year. 

Pick up our latest here: