20th November - Has sentiment changed in the Japanese bond markets?
23 November 2015
TECHNICALS:
JGB Monthly continuation chart
The JGB market has been the most bullish of all the major bond markets in the World.
Note the initial reluctance to breach the old 2003 high in 2013, but once that was overcome later in 2014, those Prior highs acted as good support in 2015 especially.
The market then looked very bullish and solid.
No surprise then, that the market has surged up again to the All-Time-High of 148.68 established in January this year.
But it has not yet driven thought it.
Do the short-term charts suggest that is likely?
JGB Dec 15 Daily chart
This chart gives the bulls food for thought:
It is very short-term, but the price action since the beginning of October and the sharp reversal on the 19th November may have revealed a fragility which could gather pace in the next few weeks.
Watch carefully the market’s reaction to the first support from the quite well established diagonal support drawn from June 2015.
A failure there may would lead to a test of the support from 147.74/147.89.
If that level broke, the double failure in the long-term charts at 148.68 would be grave for the bulls, since it would suggest a retest of the 146.50 level – see the monthly chart.
FUNDAMENTALS:
The JGB has been locked in a period of sideways trading near the All-Time-High for several weeks, but after yesterday’s abrupt sell-off the question begs asking: has sentiment turned?
Traders have asked this question on many occasions during the long Bull run that began back in the early 1990’s.
Then, Japan’s economy experienced the start of what has been approximately 25 years of deflation and frequent recession, so the market make fresh highs again and again.
The current Prime minister’s plan to revive the economy by driving up inflation over a 2-3 year period, has clearly failed. After a brief period when inflation recently hit 2-3%, it has since dropped back to zero and that is where the Bank of Japan forecasts it to remain over the medium term.
Moreover, this week’s Q3 GDP data showed Japan back in recession. The 4th recession in the last five years and that after the Bank of Japan has implemented an aggressive QE program and numerous fiscal stimuli from the Government.
It was assumed the BOJ would announce some new easing measures in an attempt to breath some life back into the economy, but it appears they have passed on that opportunity at this week’s policy meeting.
What more can the authorities do to revive growth in an economy that back in the 1980’s was forecast to by now have overtaken the US as the world’s largest economy?
For the JGB the out look is unclear. From an historical point of view one could simply say the market will do what it has done in the past: correct and then go on to make new highs, but history isn’t always a guide to the future.
Truly weak economic performance is usually bullish for Bond markets as it usually leads to easier monetary policy and lower long-term Bond yields. And that scenario has played out quite frequently over the past 25 years. But the fact the JGB sold off on the back of quite weak data suggests something might be changing.
Perhaps it is the thought that:
Which ever of these is the reason, the JGB looks vulnerable at a time when the Euro Bund has recovered from a correction of its own and is again approaching the highs in anticipation of yet more monetary policy easing from the ECB.
We are reluctant to forecast a bear market in the JGB at this point, but neither would we rush to buy it.
A market that fails to rally on what would normally be considered a bull signal is trying to convey a message that something has either changed or is changing.
The long bull market in the JGB will at some point end. Perhaps it will be as a result of the Bank of Japan’s inaction in response to yet another recession..
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13th November - Gold is vulnerable