An eventful week: focus on Japan

8 Apr


It was an eventful week for financial markets last week : new price index highs for the S&P 500 were followed by a disappointing jobs report which triggered a small sell of in most developed equity markets. There was also a broad fixed income rally across markets with Italian and Spanish yields sent around 40 bps lower by ECB comments, and long end gilt yields pushed around 10bps lower on Friday alone. 50 year UK linkers now trade with a real yield of around -0.25%.

However, the real excitement was in Japan.

In a previous post I highlighted the stellar few months the Nikkei had enjoyed at the end of 2012 and the start of 2013, this had been caused by the general stimulatory stance of the new government, and went hand-in-hand with a weakening of the yen which traded from a high point of around 80 to the US dollar in late 2012 to around 90 to the USD dollar by March 2013.

This was just the first part of the story.

As has been widely reported, the Bank Of Japan last week announced a huge program of bond-buying, expanding both the size and duration of the BOJ’s balance sheet, markets responded sharply.

As shown in the figure, the Yen weakened sharply against the dollar, by almost another 5% from a level of 93 to the dollar to around 97.

The Nikkei rallied another 3%.

What was more interesting was the behaviour of the JGB futures market, this has seen quite wild price movements in the last few days as highlighted in this piece by zerohedge. The price swings have been so extreme that circuit breakers caused the exchange to halt trading in 10 year JGB futures, two days in a row. The net result has been a sharp move higher in the 10 year JGB yield (about 5 bps higher, vs a yield level of 0.5%) and lower in the total return index. the moves in the level of the futures price were significant,around 1-2% in a price that had experienced annualized volatility of only 3-4% over the last ten years (Friday’s move was roughly a 6 standard deviation event based on the previous 10 years of daily data).

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