Article / 01 February 2016 at 11:16 GMT

Daily Shot: Negative yields becoming fashionable

TradingFloor.com Team / Saxo Bank
Denmark
  • Japanese government bonds turned red after surprise rate cut
  • Total balance of government bonds with negative yields hit $5.5 trillion
  • The Ukrainian hryvnia (UAH) is depreciating again
  • US dollar strength has been a significant drag on US GDP growth

By Walter Kurtz*

Once again, we begin with Japan. Speculative accounts' net yen position had spiked in recent weeks. That must have been extremely painful on Friday morning as the JPY gave up almost 2%. It will be interesting to see who got caught in this surprise BoJ move.

Japan
In the bond markets the 10-year Japanese government bond (JGB) yield falls below 7 basis points this morning, a new record low, ...
New record low yield for BoJ ... while the 5-year yield moves deeper into negative territory. Will this force JGB investors into "riskier" domestic markets or just send them abroad?
 
In fact according to JPMorgan (via the Financial Times), the total balance of government bonds with negative yields hit $5.5 trillion after the BOJ action on Friday. Incredible.
negative yields becoming a common thing separator
In the Eurozone the recent market jitters are making their way through the area's economy. Loan and money supply growth came in below consensus.
Eurozone data update
To give the ECB's Draghi even more ammunition for an additional easing move, Spain is still struggling with deflation. Here is a month-over-month CPI chart.
Spanish inflation in the red
We had some positive news from France where business investment in 2015 rose sharply. Hopefully this can be sustained given all the market uncertainty. 
Good news from France
According to Bloomberg, investor attention has shifted to the Bank of England as the next central bank to ease. The short-term implied vol on GBPUSD options has spiked as traders bet the BoE will respond to the BoJ. This is somewhat surprising, given that while the BoE is clearly concerned about disinflationary pressures, the UK economy remains relatively robust.
Bank of England the next one to ease?
We've seen some relief for the Swiss National Bank in the currency markets. In spite of the ECB's dovish stance, the Swiss franc has been weakening lately. Some of this was driven by the SNB selling Swiss francs (buying euros), but whatever the case the central bank has been able to stabilize the nation's currency. This is very much needed to keep the country's most severe deflation from worsening.
EURCHF
Switching to emerging markets, here is the latest.

1. Malaysia continues to be plagued by corruption scandals. Here is one related to the 1MDB sovereign wealth fund.
BBC on Malaysia
As expected, Malaysia's consumer sentiment hit new lows.

2. The Ukrainian hryvnia (UAH) is declining again. The nation's central bank is trying to preserve its limited FX reserves, not making dollars available in the market. There is also a delay in the next tranche of the IMF bailout funds ($17.5 bn).
USDUAH
3. S&P has downgraded Azerbaijan's debt to junk. The currency of the oil-dependent nation has been devalued dramatically last year. The chart below shows the US dollar appreciating against Azerbaijan's manat (AZN).
USDAZN
4. Brazil's budget gap worsened. The recent spike was due to a one-time event, but it was worse than consensus nevertheless. The overall budget deficit jumped to a record BRL 613bn in 2015. 
Brazil's budget gap
5. Fitch shows a link between the US dollar strength and the deterioration its EM sovereign ratings index. Not surprising.
USD strength and EM weakness
Back in the United States, here are some trends making news lately.

1. With the global yields continuing to fall (discussed above), here is the 10-year treasury yield.
falling yields
2. US employment cost index of wages remains barely above 2% on a year-over-year basis. Those wage pressures we've been promised remain elusive.
US employement cost index
3. The Citi economic surprise index has been below zero most of the past year and is moving lower this year.
 
4. As this next chat shows, the US dollar strength has been a significant drag on US GDP growth. 
USD strength and US GDP growth separator

Turning to Food for Thought, we have 4 items this morning:

1.Let's begin with politics. The economy remains the top issue for US voters. Interestingly, many candidates seem to be focused on immigration and terrorism instead.
top issues US electorate
2. Here is an interesting graphic from the Economist showing the key events faced by the USSR and later Russia - with the oil price overlaid.
Russian events and the oil price
3. iPhone vs. iPad sales. 
iPhone vs iPad sales
 Thanks to Josh, @NickatFP, @MattGarrett3, Jake Badalamenti, and Ycharts.com for helping with research for the Daily Shot. 

 — Edited by Clemens Bomsdorf

* Walter Kurtz is an alias

**This is an abridged version of the Daily Shot. To subscribe to the full version, link to the Daily Shot and select the appropriate command. E-mail addresses are never shared with anyone.

 

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