Bonds Routed, Stocks Up, All is Normal?
As if there was ever any doubt that the central banks would not flood the world with unlimited amounts of paper as the Bank of Japan and the ECB both reaffirmed their loose monetary policies which sent equities around the world flying higher.Â It is too bad, of course, that organic growth only accounts for about 40% of the earnings growth we’ve seen in the S&P 500 since Q3 2011 (H/T Zerohedge by way of JPMorgan).Â The other 60% is simply due to share buybacks because companies don’t know what else to do with that cash they are generating.
The talk from the ECB and the BoJ sent bonds crashing, but, most notably, was the move in U.S. Treasuries as the 30 year bond jumped nearly 4% to a 3.29% yield.Â I believe this move is significant as the 3.2% area has been a level defended strongly by the Fed for months now and it has fallen, at least so far, this week.Â If we have a close on Friday at or above these levels that would be a bearish break down of the 30 year yield on a weekly and monthly basis and confirmation of a resumption of the rising yield trend which began last July.
Now, rising yields with a rising dollar is nothing to worry about per se.Â People are buying dollars and selling bonds.Â And most of that dollar buying is occurring due to the weakening of the Japanese Yen and the Euro.Â The problem for Japan is that we are seeing rapidly rising bond yields as well.Â So, a falling currency (net selling)Â and a falling bond market (net selling) means that the situation for Japanese assets could begin feeding on itself rather rapidly.Â Watch 1% on the 10 year JGB and for the Fed to jawbone soon to get bond yields back in the box.
Tom is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.
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