Yen Carry Tumbles, Dragging Equity Futures Lower As Asian Stimulus Hopes Fade

It took Virtu’s idiot algos some time to process that the lack of BOJ stimulus is not bullish for more BOJ stimulus – something that has been priced in since October and which sent the USDJPY up from 97.000 to 105.000 in a few months, but it finally sank in when BOJ head Kuroda explicitly stated overnight that there is “no need to add stimulus now.” That, and the disappointing news from China that the middle kingdom too has no plans for a major stimulus, as we reported last night, were the final straws that forced the USDJPY to lose the tractor-beamed 103.000 “fundamental level”, tripping the countless sell stops just below it,  and slid 50 pips lower as of this moment to overnight lows at the 102.500 level, in turn dragging US but mostly European equity futures with it, and the Dax was last seen tripping stops below 9400.

Overnight markets are fairly mixed with Japanese equities again under pressure (Nikkei -1.36%), as dollar-yen slips below 103. The BoJ kept its policy unchanged today, which was the first of its two meetings this month. The BoJ said that the Japanese economy has continued to recover moderately, albeit with some fluctuations due to the recent consumption tax hike. The BoJ also said exports have recently levelled off “more or less”. Chinese equities (Shanghai Comp +0.7%) have returned from their long weekend shrugging off the price action from the US over last couple of days. On the topic of China, DB’s Chinese banking analysts have published the results of a proprietary study on 2,400 Chinese corporate bond issuers and 13,000 collective trust products. Their analysis shows that 37% of the outstanding corporate bonds were held by the listed Chinese banks as of 2013, which also provided 36% of funds that financed the trust sector, implying listed bank asset at risks of potential default worth Rmb88bn. They believe the risks to the banks are more than covered by the Rmb819bn of excess provisions set aside.

Yesterday was another day where EM felt firmer than DM. Indeed the MSCI EM index (+0.21%) has now posted its 13th gain from the last 16 sessions, headlined by Brazil’s ibovespa which is up 16% during the same period. There were still pockets of volatility yesterday namely in Eastern Europe where relations between Russia and Ukraine appeared to have reached another low, affecting bond prices and FX in neighbouring sovereigns. Russian 5yr CDS widened 16bp to 225bp as tensions with Ukraine escalated. Pro-Russian protestors in the eastern Ukraine city of Donetsk called for a referendum before May 11th on the region’s status. There were similar independence claims made in Kharkhiv. The US said that there is evidence that pro-Russian separatists in eastern Ukraine are not locals. White House spokesperson Jay Carney said that “If Russia moves into eastern Ukraine, either overtly or covertly, this would be a very serious escalation”. (Bloomberg). Overnight, the Ukrainian government said that a regional government building in Kharkhiv had been cleared of separatist forces in an “anti-terror sweep”. Central Kharkhiv has been closed while government operations are being carried out.

Looking at the day ahead, today sees the unofficial start of Q1 earnings season in the US as Alcoa cuts the ribbon. Markets are looking for Q1 EPS of 5.1c on revenues of $5.56bn. As always, management’s outlook statement and colour on industrial demand will be closely followed. The JOLTs jobs report, which is closely followed by the Fed Chair, will be released today. There’s not a lot of data in Europe outside of UK industrial production. The Bundesbank’s Weidmann speaks today at a German Banking Congress. Yesterday he was quoted as suggest his earlier comments on QE were misinterpreted. So today’s words will give him a chance to perhaps set the record straight on his views.