Skip to main content

Once, Twice, 3 X A Lady

Yes, I am still talking about bond yields going past 5% in the states. The chart showed that even the more super-charged internet bull run in 1999/2000 was eventually decimated by continuous rate hike. I believe the 99/2000 bull run was a few notches stronger than the current bull run, and may take less than 6.5% to reduce the run to a trot. I think my really danger level to get all out of equities is when yields reach 5.5%. Last week it hit 5.14% which was a relatively big jump aove the 5% threshold.

The chart also showed that one rate hike is not sufficient to puncture a bull. It has to be followed by successive hikes. As mentioned before, globally every country/zone that matter are about to raise rates even higher in the forseeable future: UK, euro zone, China, HK and Japan. In fact I don't see any major country contemplating NOT hiking rates for the rest of the year.

This bull is harder to be pricked because its a money supply growth driven rally. What that means is a lot of liquidity chasing after a reducing pile of assets and alternatives. I have been bullish since 2005 and have maintained that stance till now. I am still bullish but the signs are there that we are moving into the last stage of a 4 stage bull run which began in 2005.

In the US, a government report released last Thursday said labor costs are up more than anticipated, making it more likely that companies will raise prices and fuel inflation. Options traders raised the odds of a boost to 5.5% in the fed funds rate to nearly 41%. A month ago, the odds were zero. Those are big danger signals. Plus, any rate hikes by Japan, China or euro zone will immediately put very strong downward pressure on USD thus forcing the Federal Reserve's hand to raise rates in order to keep people holding USD.

If you were to look at the unbelievable NZ dollar, you will know that sensibility boundaries are being tested currently. NZD surged to a 22 year high early last week to 76.3 US cents. However late in the week, it had a minor collapse, dropping nearly 1.5% in value. NZD has been a big beneficiary of carry trades as investors borrow in yen and bought the kiwi dollar as it is now carrying 8% in interest rates. For a small economy such as NZ, 8% will stifle much of the economy, but it has to do that to keep the NZD steady. NZ's interest rates is the highest among all 30 OECD nations. Interest rates has to be high as there is ample liquidity coming in, and high rates are needed to stem inflationary pressures, currently running at 3% p.a. and pushing up. Billions of dollars worth of Uridashi bonds - issued to Japanese investors who borrow cheaply in yen, receive the bonds denominated in Kiwi dollars and earn New Zealand interest rates - have helped prop up the Kiwi dollar. Even the RBNZ was quoted as saying it regarded current levels of the exchange rate as exceptional and unjustified. The fact that te NZD has just broken a 22 year high at levels that their own reserve bank don't think is equitable should indicate troubling waters ahead.

Many factors could unravel the NZD: a) higher rates offered by other currencies relative to fundamentals (e.g. another hike by ECB may make holding the euro highly attractive relative to NZD as euro zone may have more stability and economic sustainability); b) yen carry trade holders panic and start getting out, prompting a rush for exit doors (as it is, NZD could easily go back to 68 US cents and still be considered fairly valued.) I have chosen to highlight the NZD as its the most visible for now, and an implosion in NZD could have some ramifications on global markets, especially emerging ones.

Why do I see rising rates as a determining factor? Because low bond yields and interest rates have been largely responsible for the two major factors which have been driving up markets over the past 2 years: a) private equity funding; and b) companies buying back shares. Higher bond yields and interest rates would make it much harder for PE firms to leverage and turn around companies (and PE firms feed on debt to enlarge returns and reduce capital commitments.) Higher yields and interest rates would narrow the gap between stock yields and risk-free yields, which will start to reduce the amount of share buybacks eventually.


boyplunger said…
What cause the yields to rise in the first place?in this case in the US?
Pricechart said…
A wave in motion can keep going until the tide turns. How long? Trillion dollars question now.

Since NZD is being single out, we can also look at others JPY crosses in order of yield differential.(central bank rates)

NZD/JPY 8-0.5=7.5
AUD/JPY 6.25-0.5=5.75
GBP/JPY 5.5-0.5=5
USD/JPY 5.25-0.5=4.75
CAD/JPY 3.75 (NET)

Now if you look at the monthly price chart of the above:
NZ is all time high level.
OZ is all time high.
GPB is 8 years high. (on the verge of breaking out a big base)
USD is at 5 years high.

what can keep the motion going?
As long as the big gap of yield dirrential exists.

How can the tide turn?and When?
Narrowing of yield dirrential.
When you see that, pls give me a ring at gmail, my name is price chart....haha.

Yesterday, the AUD/JPY went back up to high point and NZD recovered from the sell down.CAD/JPY is going strong while USD GBP and EUR is maintain against JPY.

BTW, some other countries that have equal or higher rates than NZD:
Brazil 12.5
Turkey 17.5
Iceland 14.25
Hungary 8.0
South Africa 9.0
Egypt 8.75

Well, the trillion dollar "yen" question!!!
ilanit said…
The Orange County equity investment Firm invests in network-enabled service companies, specifically those that leverage networks to enable communication, deliver content and facilitate commerce. Meritage is stage-agnostic; seeking opportunities where the Firm's operating expertise and sector knowledge can guide the strategic direction of its portfolio companies and create sustainable value.

Popular posts from this blog

My Master, A National Treasure

REPOST:  Its been more than two years since I posted on my sifu. This is probably the most significant posting I had done thus far that does not involve business or politics. My circle of close friends and business colleagues have benefited significantly from his treatment.

My Master, Dr. Law Chin Han (from my iPhone)

Where shall I start? OK, just based on real life experiences of those who are close to me. The entire Tong family (Bukit Kiara Properties) absolutely swear that he is the master of masters when it comes to acupuncture (and dentistry as well). To me, you can probably find many great dentists, but to find a real Master in acupuncture, thats a whole different ballgame.

I am not big aficionado of Chinese medicine or acupuncture initially. I guess you have to go through the whole shebang to appreciate the real life changing effects from a master.

My business partner and very close friend went to him after 15 years of persistent gout problem, he will get his heavy attacks at least…

PUC - An Assessment

PUC has tried to reinvent itself following the untimely passing of its founder last year. His younger brother, who was highly successful in his own right, was running Pictureworks in a number of countries in Asia.

The Shares Price Rise & Possible Catalysts

Share price has broken its all time high comfortably. The rise has been steady and not at all volatile, accompanied by steady volume, which would indicate longer term investors and some funds already accumulating nd not selling back to the market.

Potential Catalyst #1

The just launched Presto app. Tried it and went to the briefing. Its a game changer for PUC for sure. They have already indicated that the e-wallet will be launched only in 1Q2018. Now what is Presto, why Presto. Its very much like Lazada or eBay or Alibaba. Lazada is a platform for retailers to sell, full stop. eBay is more for the personal one man operations. Alibaba is more for wholesalers and distributors.

Presto links retailers/f&b/services originators with en…

How Long Will The Bull Lasts For Malaysia

Are we in a bull run? Of course we are. Not to labour the point but I highlighted the start of the bull run back in January this year... and got a lot of naysayers but never mind:

p/s: needless to say, this is Jing Tian ... beautiful face and a certain kind of freshness in her looks and acting career thus far

I would like to extend my prediction that the bull run for Bursa stocks should continue to run well till the end of the year. What we are seeing for the past 3 weeks was a general lull where volume suddenly shrunk but the general trend is still intact. My reasons for saying so:

a) the overall equity markets globally will be supported by a benign recovery complemented by a timid approach to raising rates by most central banks

b) thanks to a drastic bear run for most commodities, and to a lesser extent some oil & gas players, the undertone for "cost of materials" have been weak and has pr…