BULLS IN A CHINA SHOP
Courtesy of Grant's Almost Daily
Meet the new boss. Citing estimates from the NLI Research Institute, Bloomberg reports today that The Bank of Japan has emerged for the first time as the largest owner of local stocks with a portfolio equivalent to ¥45.1 trillion ($434 billion) at the end of November. That tops the ¥44.8 trillion holdings from the Government Pension Investment Fund, the world’s largest pension fund.
The BoJ’s decade-long ETF purchase program explains that sea-change, as that accumulation has eclipsed the GPIF’s despite the latter entity doubling its allocation to domestic equities, to 25%, in 2014. The BoJ, for its part, ramped up its ETF shopping spree earlier this year as the bug bit, establishing a ¥12 trillion accumulation ceiling in March, double its prior annual target.
That dynamic duo’s prolific exploits leave some cold. The idea of “a state-run institution, the BoJ, and the country’s representative public pension fund, the GPIF, buying up local equities feels distorted,” Satoshi Okumoto, CEO at Fukoku Capital Management, complained to Bloomberg. The pair’s holdings account for some 14% of Japan’s total equity market capitalization, which currently foots to about $6.7 trillion. More clarity should be forthcoming, with the BoJ set to convene for its next policy meeting on Dec. 17 and 18.
While Japanese policy makers continue to throw their weight around in the stock market, central bankers on the Old Continent focus on another financial front. With the European Central Bank widely expected to accelerate its current €1.35 trillion ($1.63 trillion) emergency asset purchase program to as much as €2 trillion at its Thursday meeting, sovereign creditors have flourished in Frankfurt’s warm embrace. This morning, the yield on triple-B/triple-B-minus-rated Italy’s 10-year bonds fell to a record low 0.59% and 10-year paper issued by double-B-minus-rated Greece plumbed fresh depths of 0.74%, while on Nov. 27 triple-B-rated Portugal saw its 10-year debt trade to a negative yield for the first time.
Those sightings color ECB President Christine Lagarde’s March declaration that she was “not here to close spreads” between the bloc’s stronger and weaker members, words which at the time spurred a jump in borrowing costs for the E.U. periphery. Subsequent events have called that assertion into question. “The ECB is doing some kind of yield curve control and spread control,” Isabelle Vic-Philippe, head of euro government bonds at Amundi, tells the Financial Times. “They can’t say that, but this is what they are doing, frankly speaking.” Sandra Holworth, head of global rates at Aegon Asset Management, summed up the investor calculus thusly: “Why wouldn’t you buy Portuguese or Italian bonds if you know you have the support of the central bank?”
Stateside, the Federal Reserve’s Open Market Committee prepares for its Dec. 16 rate decision with the state of the labor market front and center. Namely, unexpected softness in last Friday’s November non-farm payrolls could potentially spur an escalation of the Fed’s own bond-buying program, which has helped catalyze a near-80% year-over-year increase in Reserve Bank Credit.
Recent commentary suggests that more monetary tinkering could indeed be forthcoming, with a potentially brutal winter in store. Neel Kashkari, President of the Minneapolis Fed, stated on a Friday virtual event that: “We are a long, long way away from a fully recovered economy.” Chicago Fed President Charles Evans (currently a nonvoting member) told reporters Friday that he is “comfortable with our current setting for asset purchases. . . I’m not opposed to more accommodation. I just am not exactly sure what the right timing is.” One thing’s for sure, the Fed isn’t going anywhere, as chairman Jerome Powell explained to Congress last week: “We are going to keep our rates low and keep our tools working until we feel like we really are very clearly past the danger that is presented to the economy from the pandemic.”
Meanwhile, the seemingly growing prospect of further monetary and/or fiscal stimulus has coincided with the sharpest Treasury selloff since mid-March, as the 10-year yield reached 98.5 basis points on Friday. The bond market’s off-script zig-zag may not last much longer, if the monetary mandarins have their way. Noting that “traders expect the Federal Reserve to quickly clamp down on any large and sustained increase in long-dated Treasury yields,” Bloomberg Opinion’s Brian Chappatta explains the rationale:
Some strategists suggest the central bank will announce such a move to tame the bond market on Dec. 16 by extending the weighted average maturity of the $80 billion in Treasurys it purchases each month. That’s not quite yield-curve control in its purest form, but it effectively sends the same message: We won’t tolerate a selloff of this magnitude.
RECAP DEC. 7
Stocks fluttered slightly lower with the S&P 500 finishing 20 basis points south of unchanged, while Treasurys caught a solid bid with the long bond dropping to 1.69%. Gold jumped to $1,868 an ounce to continue its rebound, WTI crude pulled back below $46 a barrel, and the VIX bounced to 21.3 as the CBOE’s volatility index has yet to break below 20 on a closing basis since the pandemic took hold.
– Philip Grant
