A confusing year for markets made worse by a rebound in JPY – AGFxC

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the global financial markets have been confusing this year, lacking clear themes and often seeming at odds with historical relationships. 

Key Quotes

“There has been evidence of high risk aversion, such as a strong JPY, record lows in global bond yields, a deep fall in GBP and weaker EUR/CHF and EUR/DKK.  But there has also been evidence of improving risk appetite, such as stronger commodity prices since January. And emerging market currencies and equities have generally out-performed developed market equities and most developed market currencies; including the EUR and USD.

It appears that extreme low government bond yields have forced investors into riskier assets including equities, corporate and emerging market bonds and currencies, even though confidence in global growth has ebbed and fears for global market stability have increased.

Part of this process has been more proactive central bank policy generating downward pressure on global bond yields.  While this may have supported riskier assets it has failed thus far to raise global growth and inflation expectations.

As such, some investors have become worried that monetary policy has run out of scope to further drive growth and inflation higher, turning the conversation to what next – including the need for faster structural reform, fiscal spending, and fashionable calls for something called helicopter money, which may have several meanings in practice, but broadly refers to a central bank financing fiscal expansion.

A significant contributor, in our view, to the unusual state of markets, where yields have plumbed new depths has been the remarkable strength in the JPY this year, and to a lesser extent the firm EUR, in the face of further rate cuts into negative territory.

The market had begun to fear that Japan in particular could not escape deflation. Its already aggressive monetary policy actions were failing and negative rates may have even been counter-productive; undermining bank profitability, and weakening consumer and broader economic confidence.

As such, we look on the bounce in the USD/JPY this week with extreme interest.

The rise in USD/JPY since the strong result in the Upper House election for the ruling LDP led by PM Abe and its coalition partner the Komeito Party may be a significant boost for global confidence.  It may help turn from down to up the trend in global yields and breakeven inflation expectations, from their recent record lows.”