• Weekly Comments for July 5, 2016

    The market was relatively stable on Friday, digesting the stunning reversal of the past four days. We can see below that the S&P500 is above its envelope, which makes buying here a statistically poor idea.

    As a matter of fact, I closed my long positions and shorted SPY on Friday since the week following July 4th is traditionally weaker.



    We all know that central banks are engaging with more easing and Nirp, which in the past few years has forced pension funds to take more risk and invest in high yielding equities (Reits, Utilities, Tobacco, Mammoth stocks...)

    I was stunned to see the recent figure posted by wolfstreet.com showing that the largest Japanese pension fund has already invested 20% of its assets in international equities. This move occurred even before the BOJ Nirp. How much more have they bought now and for how long can this continue? I have the feeling that they must now be close to 30% of investments in foreign stocks, which makes me believe that they will not go much higher.

    http://wolfstreet.com/2016/07/03/aft...fter-election/



    Gold has had three breakouts in past days, probably the result of Nirp/Brexit disruption fears.



    But...US Treasuries have been sold in the past two days. I would say that this is just an overbought reaction. I do not see US rates jumping higher, unless Yellen talks them higher.



    Still, the most interesting figure is the UST/JPT differential, which is very bearish for equities.



    The above differential indicates that US yields have fallen faster than Japanese yields. Beware of the scale differences in the two figures below: during the last dump, US yields went from 1.75% to 1.45% (a drop of 0.3%) while the Japanese yields dropped by only 0.1%, from -0.15% to -0.25%.

    No wonder the Yen is high: Japanese pensions prefer keeping their cash or buying foreign bonds that having to pay a negative rate on Japanese bonds.





    Regarding the Reverse Repo, we can see that it indeed miraculously spiked on June 29 (I guess that it pushed higher on June 30.) By definition, these spikes are reversed in subsequent days.



    Conclusions:

    Central banks have provided emergency funds in the past few days, pushing asset prices higher, and I believe they are now congratulating themselves for having successfully managed a very negative downturn.

    It will be interesting to see how the market will act when central banks pull liquidity out next week. I think the bearish US/Japanese yield differentials will also put some pressure on US equities.

    Finally, I wonder how much buying power for US assets is left since Japanese pension funds are now
    probably 30% invested in foreign stocks. Would they dare to go 50%?

    Let's hope that China does not announce a surprise devaluation over the weekend, taking advantage of the long break.