Those of us with children will be used to this refrain as we turn out of the driveway on the way to destinations unknown. Equally we will smile when recalling that “les enfants terribles” were more than likely asleep when we did eventually get there. A perfect analogy for market participants in this most unloved bull market perhaps. In the last edition of the View we asked “When?” and suggested that all was fine as long as the central bank narrative held together. This past week has put that idea very much to the test.
The US jobs numbers were below expectations and the markets rallied thinking that the Fed wouldn’t raise rates in September after all – the 21st is the day to put in your diaries. Then the Fed vice chairman, Stanley Fischer, opined that negative interest rates seem to be working in other countries; “seem” being the operative word… He was quick to deny that the Fed would introduce them in the US and even implied that they could raise rates whilst others were cutting!
We then had Kurodasan, the Bank of Japan governor, saying that he would cut rates as far into negative territory as needs be if the current policies fail to stimulate the economy; a dilemma the BoJ has been facing for the last 25 years and counting; will they ever get the message? Well the bond market might just deliver it to them. In the past few weeks the yield on the 10 year JGB has gone from minus 0.3% back to pretty much 0%. It doesn’t sound much, but the losses inflicted on short term traders, especially those whose positions have any element of gearing, have been more than painful; it has been described as a “VaR event”.
VaR, or value at risk, is a rather quaint, but almost universally accepted, method of determining the risk that, for example, trading desks in banks subject themselves to in their dealing with Mr. Market. VaR calculates the likelihood of loss in the following days trading based on current positions and historic volatility of those instruments. So VaR may be say an acceptable 1% or 2% with usually a “high” degree of probability. There are of course outliers outside the “high” range, but they are only supposed to come along once in a blue moon, and risk controllers and management content themselves with that fact; until it all blows up, which is beginning to look like the case with JGBs.
The malaise has already spread to other sovereign bond markets with a Bloomberg headline on Friday proclaiming that Bund yields had “soared” to 0%! This came on the back of the ECB press conference on Thursday, given by Mario Draghi, who was far from convincing in terms of both what he said, “the European economy continues to recover”, and his general demeanor, which was something a lot more than “defensive”. As for the latter a rabbit in the headlights would be apt and as far as the economic recovery goes, saying that it is anaemic at best would be very generous.
The equity markets, oil and precious metals all took a hit as well and the opening on Monday morning will be “interesting”! The futures markets are already suggesting that FTSE will open 70 points below Friday’s close so tin hats on and let’s see what these central bankers are made of!
Clive Hale –The View from the Bridge – September 11th 2016