Markets are flooded with inconsistencies

The S&P rose for a 3rd day as a sharp climb in shares of Tesla (+8.03%) overshadowed weakness in energy and bank stocks, while Russia and Ukraine were poised to hold their first face-to-face peace talks in more than two weeks. The market may well remain supported into the month and quarter-end given bond/equity rotation, although pockets of the market look very stretched on a short-term basis.

Lockdowns in China weighed on mainland stock while tech outperformed across the broader region mirroring the US session. Still, China-related equity markets (e.g. CSI 300, Hang Seng Index) remain relatively unperturbed by Shanghai’s covid-related lockdown. This could reflect an expectation that business closures will remain short-lived.

Japanese shares led gains in Asian stocks as the Bank of Japan defended its ultra-easy stance to keep monetary policy ultra-loose, offering to buy unlimited government bonds for the first four days of this week NK225 +1.1%.

OIL

The Ukraine and Russia talks seem to be inching towards a ceasefire, although this is primarily priced by the oil market.

I think we are seeing a bounce higher in Asia today and follow through in London as China lockdowns could remain short-lived. Well, that is the read, though, from local risk markets.

That said, markets are flooded with inconsistencies that suggest traders should approach factor and correlation analysis with greater caution. Higher rates vol is met with a collapse in equity market vol. Energy markets are softer, while metals are well supported, to highlight the obvious ones.

FOREX

Japan MoF Weighs In On Currency

Comments from Japan Deputy Finance Minister Kanda are in keeping with recent comments from Finance Minister Suzuki that the department is closely watching FX. Headlines relating to Kanda’s comments suggest that JPY’s weakness was discussed with his US counterpart.

As is usually the case with the Finance Ministry, “excessive moves in FX” were outlined in the context of the negative impact importing inflation can have on the economy but didn’t express the export benefits of a weaker JPY with the US currency police (Treasury) looking over everyone’s shoulder. This line is typically used for the domestic corporate audience when USDJPY turns a bit squirrely. Still, the hurdle remains high for official MoF intervention (beyond verbal)

USDJPY has already touched the ‘Kuroda line’ of 125, the real effective exchange rate of JPY is already extremely weak – the lowest in fifty years -so it is not a surprise for policymakers to begin commenting that the level of the currency is too low or its pace of decline too steep. But that doesn’t necessarily mean they will sell dollars.

It’s times like this that I need to remind myself the BoJ tends to be at the Vanguard of non-consensus central bank thinking.

However, few, if any, expected this move to 125. But if there was any doubt that this Fed hiking cycle is different this time around, look no further than the spike in US two-year yields this month . Typically JPY sells off around the start of Fed hiking cycles, but this time it exploded.

Japanese implied interest rate volatility had also jumped to the highest since 2015 before the BoJ rolled out the recent rounds of YCC. The easy FX read by putting 1+1 together suggests increased policy divergence between Japan and the rest of the world should see JPY weaker. Still, the rates market is starting to doubt how long this can last: I think 125 will be the crossroads, and either Japan will accept higher inflation by tolerating a currency overshoot ( 130), or the BoJ will have to abandon yield curve control just like the RBA did last year and send USDJPY back to 115.

From Stephen Innes, Managing Partner at SPI Asset Management