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No doubt Kyle Bass (arch Japan bear and well known hedgie) and many other hedge fund managers over the last 15 years would answer the question in the title of this article with a resounding “No!” Not for no reason is the short JGB trade known as “the widowmaker”…
With everyone anticipating a prolonged BOJ intervention program what with the perpetual bid for JGB’s by the BoJ at present, many fear that reselling bonds could become virtually impossible to cover any short positions. However, in an interesting piece of research released a few days ago, Barclays Research pointed out what they perceive to be a massive disconnect between the fundamentals and the current pricing of Japanese bonds and which, they reason, cannot last forever. Let us take a closer look at their observations…
Barclays believes that the current macroeconomic policy and the latest economic data are not reflected in the long end of the Japanese yield curve. In other words, the massive reflation policies being pursued by the BoJ under the economic program known as ‘Abenomics’ is not currently reflected in certain parts of the yield curve, in particular the 5yr + part and where yields present something of a conundrum. The peculiar position is that IF the Abenomics policies are successful, then yields at the long end are presently too depressed and must, by default, rise. Thus a unique opportunity to short bonds is now presented.
The forward rate 5yr benchmark yield has in fact been declining since 2004. What with the massive purchase of government bonds by the BOJ in recent years, this has contributed to a generalised advance in bond prices (and hence the opposite effect on bond yields). At the same time, this massive buying has also helped contribute towards pushing consumer prices higher and further, policy is set on a further increase in the CPI towards 2%.
The latest data reveal that notwithstanding the recent new consumer tax rise, the Japanese economy is now improving. After more than 20 years of stop-start deflation, the bold Abenomics policies implemented so far have in fact succeeded in pushing prices above the key 1% level and the unemployment rate down to 3.6%. While the Japanese central bank’s intervention is depressing short-term bond yields, it should in fact be pushing the long end of the curve higher as improved economic conditions mixed with rising inflation expectations logically has a positive impact on long-term yields (that is raises them).
What with the unemployment rate currently sitting at just 3.6%, the supply side of the labour market is becoming tighter and which means it is more exposed to wage pressures which, economic theory dictates, translates into inflation pressures for the near future. At the same time, many analysts expect the BOJ to extend the current 60-70 trillion p.a yen QE package at the next meeting scheduled for the end of this month and which will so create further inflation pressures.
Remember the principal goal behind the Abenomics policies is aimed at reflating the Japanese economy and currently they appear unwavering in pursuing this goal. With forward rates on a declining trend for almost 10 years now, and, amazingly, at a level below those seen during the worst of the deflationary period, Barclays just may be onto something here. At some point the market will have to catch up with the fundamentals and even if some, so badly burned of old, believe it to be too risky to short JGB, it at least may be a good idea to stop buying them. It is a trade opportunity we are watching closely…
Asian markets traded relatively flat throughout the night, unable to continue the gains seen throughout Europe and the US yesterday as Chinese HSBC manufacturing PMI data came in at 48.3, slightly better than the March figure however not yet in expansion territory. One key mover throughout the night was the Aussie dollar which tanked off the back of weaker than expected CPI data. Australian q/q CPI rose 0.6%, missing estimates of 0.8% causing the AUD to sell off.
The FTSE 100 looks set for a slightly weaker open, down approximately 6 points prior to the opening bell however we have a day full of important economic data which could swing markets either way. French Manufacturing PMI kick-starts the day at 8:00am, shortly followed by German Manufacturing PMI at 8:30am. Further into the session, GBP official bank rate votes and asset purchase facility votes are set to be released before the USD new home sales later in the afternoon.
From the Gotgoldreport site
We read all kinds of commentary on the Web about the positioning of the large traders in gold futures on the COMEX bourse. Rather than argue, let’s just point out something we think is pretty darn interesting if not telling.
We tend to focus on the positioning of the largest of the participants in the gold biz. The traders generally known as commercial traders. In the legacy commitments of traders reports (COT) the commercials include the categories now known as the Producers, Merchants, Processors and Users (which we shorten to the “Producer Merchants”) together with the mercenary banks that the CFTC classes as Swap Dealers. So today, in the disaggregated COT reports, there are two classes of traders we consider “commercial,” with perhaps the most important of them being the Producer Merchants because it is this category of trader that uses hedging to protect their natural long positioning. And, it is from their desire or motivation to hedge that we get a decent read on the attitude of the gold trade itself toward, or rather, about its expectation for the price of gold looking ahead.
We read the comments by those on both sides of the battlefield, including the likes of the already very short (with an attitude) Swap Dealer banks such as Jeffrey Currie of the mercenary firm Goldman Sachs, who is already apparently all in on the short side of gold and willing to talk their book – even when it has not “paid” to do so. But we digress… Stop the tape right here. Let’s instead just say what the record shows and have done with it for another week or two or three.
Consider that on March 18, 2014 (a month ago) traders classed by the CFTC as Producer Merchants held a net short position of 60,312 contracts with gold then having tested $1390, but having retreated back to $1355.50. In the month since then as gold continued to decline by $53.09 or 3.9% to $1302.41 the Gold Trade (the Producers, Merchants, Processors and Users) very strongly reduced their combined collective net short stance by a whopping 45,727 lots or 76% from 60,312 to show just 14,585 contracts net short as of April 15.
(Note: When rising the blue line shows the Producer Merchant net short position falling and vice versa. It showed a rare net long stance in November of 2013 to January of 2014.)
At the very least this activity suggests a lack of motivation on the part of the Gold Trade to hedge their natural long position. Looking at it another way it also suggests a bit of urgency on their part to reduce their hedging as gold retreated to near $1300. It the world of watching the largest participants in the gold biz we believe it is more important to watch when and what the participants do as opposed to what they say.
Speaking of the participants who have been vigorously “talking their book” in gold, the Swap Dealer types front and center on that score, notice that in the graph below Swap Dealers have been reducing their net short stance since March 25. To quantify that on March 25, with gold then $1310.81, traders classed as Swap Dealers reported holding 99,602 COMEX contracts net short gold. In the three reporting weeks since then, as gold edged a net $8.40 or (not much) lower to $1302.41 April 15, Swap Dealers got the heck out of an oversized 26,582 contracts of their collective net short positioning (from 99,602 to show 73,020 contracts net short).
So while we have some of the visible and vocal participants out there talking (that’s talking) their book on the short side, we can point to what the participants are actually doing with their collective COMEX futures positioning and it does not exactly follow what their bravado has been. At least it does not appear to us as though it does. What say you?
One last comment for this week. The current Producer Merchant short position – just their collective gross shorts by themselves – is the lowest (smallest) number of PM short contracts in DCOT history, with data back to 2006. In other words, with gold near $1300 the Producer Merchants (the big traders of physical gold bullion, the bullion dealers, the refiners, the producers, the jewelers, the manufacturers, and the bullion trading banks they end up trading through on the COMEX) are currently holding the smallest number of pure short contracts in our records. We believe that is the very same thing as saying that – for whatever reason – the gold trade is not, repeat not motivated to hedge (or protect against a falling price). That means to us that the industry is looking more for higher gold prices, not lower prices.
Chart showing just the Producer Merchant short contracts. As of April 15 the lowest PM short position in DCOT history. Source CFTC for COT, Cash Market for gold, GGR.