A Pivotal Moment.
Breathtaking and profoundly scary.
1. Bloomberg.com:
Days after Japanese bonds crashed, sending tremors through global financial markets, traders were still stunned by the speed and breadth of it all. A quarter-point surge in yields “in a single session,” marveled Pramol Dhawan, a fund manager at Pacific Investment Management Co., “let that sink in.”
In the Japanese government bond market of old, it would take weeks — sometimes months — for yields to eke out, tick by tick, a move of that magnitude. For most of the 21st century, the JGB market was so steady — and interest rates were stuck at such rock-bottom levels — that Tokyo was viewed by investors around the world as a source of both cheap funding and of stability during times of global turmoil.
Last week’s selloff, accompanied by dramatic swings in the yen, made clear those days are over. Inflation, long dormant in Japan, has taken hold and, moreover, Prime Minister Sanae Takaichi is pushing fiscal stimulus plans that would swell a government debt pile that is already uncomfortably large. As a result, investors have been frantically sending bond yields up to levels once unthinkable — more than 4% on the longest-dated JGBs. That’s exerting upward pressure on interest rates from the US to Britain and Germany.
Traders are braced for more disorderly market swings as Japan hurtles toward a Feb. 8 snap election for which both Takaichi and her rivals have campaigned on looser budgets. An even bigger worry for global markets over the long term is that the new normal of higher Japanese yields will prompt domestic investors to bring much more of their money back home. Some $5 trillion of the country’s capital is deployed overseas, and that’s even before accounting for the yen that foreign funds have borrowed for their wagers in financial assets around the world. (Source: bloomberg.com)
2. The prospect of the US actually joining Japan in foreign-exchange intervention is just the latest in a series of blows to a currency that’s already under pressure on multiple fronts. The dollar weakened against most major peers, the yen jumped and gold hit a record Monday as investors debated how any joint intervention to support Japan might further worsen sentiment toward the greenback. The US currency just experienced its worst week since May, after unpredictable Washington policymaking rattled financial markets. For many dollar watchers, signs of US support to boost the yen re-opens the argument about potential co-ordinated currency intervention to guide the greenback lower against key trading partners. The thinking goes that such a pact would help American exporters compete with rivals such as China and Japan, even if it raised questions about the long-term value of the world’s reserve currency. (Source: bloomberg.com)
3. Gold surged past $5,000 an ounce for the first time, extending a breakneck rally fueled by US President Donald Trump’s reshaping of international relations and investor flight from sovereign bonds and currencies. Bullion jumped as much as 2.1% to near $5,100 as dollar weakness reinforced demand. A gauge of the greenback has fallen almost 2% in six sessions, with speculation that the US may assist Japan in efforts to boost the yen adding to worries over Federal Reserve independence and Trump’s erratic policymaking. Silver also spiked to a record above $109 an ounce, gaining for a third day. (Source: bloomberg.com)
4. Robin Brooks:
The rise in precious metals prices is breathtaking and profoundly scary. Gold is now up 50 percent since August 22, which is when Chair Powell gave his dovish keynote speech at the Jackson Hole symposium, the event that started the “debasement trade.” There’s a lot of chatter about what’s driving the rise in gold prices, so this post runs through four points that I think summarize what we’re seeing.
According to Mr. Brooks, the four points are: (1) The rise in gold is part of something much bigger, (2) Central bank gold buying is NOT driving the rise in gold prices, (3) The debasement trade is a “structural break”, and (4) Dollar debasement will accelerate the rise in gold. (Source: substack.com)
