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Something’s up. Everyone can tell. But nobody is quite sure what it is.Around the world, markets aren’t behaving quite like they were just a week or so ago.



  • Bonds have been selling off in the US. Interest rates have been shooting up. The volume of US Treasury selling is enormous.
  • The dollar is surging.
  • European sovereign bond yields are diving.
  • Japan has crashed.
  • Commodity currencies (like the Aussie dollar) have been getting clubbed.

So what’s going on?

Well, a big part of this is explained by Krugman, who argues that basically we’re seeing a shift towards a much more optimistic outlook, that rising US equities, a rising dollar, and rising rates are all perfectly consistent with a market that sees a real recovery taking hold

In a more deep and complicated look, the pseudonymous analyst Barnejek has a fabulous post on his blog trying to come up with sort of a grand-unified theory of everything that’s been going on

The post is titled What I Make Of It All, and he writes:

Now, it may well be the case that we’re simply experiencing a risk-off period, although I’m not sure equity and commodities markets would agree with that fully. Neither is the UST sell-off the first thing that springs to mind when discussing the dreaded risk-off.

A theory, which is a bit closer to my heart is what Paul Krugman put in his blog today but again the USD is not really rallying. Alternatively, stuff like the Mexican peso shouldn’t be under so much pressure in such a scenario, I reckon.

I see two main forces driving the market at the moment. The first one is the Bank of Japan. In my post Eddie Vedder and the Japanese carry from April 13 (USD/JPY approaching 100 ) I was being skeptical about the whole concept of yen being used to fund stuff elsewhere saying that the Japanese will probably find plenty of opportunities locally if they believe in Abenomics. However, I did also say that if anything they’d go for bonds in the US, which are looking considerably better than other global bonds on a currency-hedged basis. Similarly, if a Japanese investor wants to bet on the yen decline, then they should keep it simple and do USD/JPY rather than, say, AUD/JPY. And this is a very important point because whenever USDJPY jumps 1%, it pushes the USD index higher by almost 0.15%, thus creating the impression that the risk is off because the USD strengthens. Therefore, the previous correlation of “yen lower, risk higher” does not work like a charm anymore.

The whole thing is really required reading.

Meanwhile, in an email blast to clients, SocGen’s Kit Juckes also takes a stab at a bigger picture view:

The Nikkei has wiped out May’s gains. Unless USD/JPY collapses a couple more percentage points, we’re still in for an unprecedented 8th consecutive month/month gain, but yesterday’s price action in yen and Swiss franc was ugly (for a bear of both). And the Japanese sales of foreign bonds are persistent enough to force head-scratching now…

My core view  – that re-calibration of  Treasury yields leads to dollar strength, EM and commodity weakness, and a much bumpier June/August period for risk assets – isn’t altered. But it’s clear that bumpiness will be felt everywhere. Since 10yr note yields fell yesterday long before the Nikkei opened, I can’t help suspecting they’ll get more help this morning. An upward revision to GDP won’t be enough to swing us the other way. It’s a bearish market but not a smooth one.

Nothing is quite satisfying. There are a lot of stories playing out, and perhaps there’s no good explanation of it all, but it’s certainly fascinating to watch the ground moving.

Albert Einstein MX