Did Japan’s Fiscal Stimulus Just Cement The Top In Treasuries?


August 2, 2016, 4:00pm EST

Yesterday we pointed to the renewed risk that oil represented for stocks.

The persistent bleed in the price of oil for the past three weeks has been with little attention.  Even the energy stocks, which have had huge runs since oil bottomed in February, were largely ignoring the slide in the most significant input for those businesses.

As we said yesterday, oil continued to leak lower, even as stocks printed a fresh record high yesterday.  As oil went out at the key $40 level, the divergence between oil and stocks had reached an extreme.  We said something has to give.

Today, it’s been stocks.  Stocks have fallen back, following the lead of further declines in crude — which settles BELOW $40 today.

Why is oil important for stocks?

As we’ve said in a world where stability is king, central bankers have been very sensitive to swings in key financial markets, with the idea that confidence and the perception of stability can quickly become unhinged by market moves. When that happens, it becomes a big, viable threat to the global economic recovery and outlook.

Now, we’ve talked a lot about the divergence between yields and stocks too.  In this post-global financial crisis world, when people feel better about the global outlook, they take risk.  That means they buy stocks and they move money OUT of the “safe-haven” treasury market.  That means yields should move higher, while stock move higher.

That hasn’t been the case.  Yields have continued to trade toward the record lows in recent weeks, even as stocks have traded to new record highs.  Why?  It’s being driven by capital flows and speculation related to central bank action in Japan and Europe.  U.S. Treasuries are offering both a relative safe haven, and a positive yield in a world of negative yields.  That keeps freshly printed global money flowing into U.S. Treasuries, which drives up price, and drives down the yield.

With that, logic has again been tossed on its head today.  Stocks are falling, along with oil.  This is typically a trigger for some elevated risk aversion.  One would think Treasuries would be rallying today, pushing yields lower.  It has been the opposite.

It may have a lot to do with the fiscal stimulus package that was approved today (overnight) in Japan.  The central banks have had the pedal pinned to the floor on monetary policy for the better part of the past seven years, and they’ve gotten no help from governments on fiscal stimulus.  Today’s move in Japan may represent a changing of the stimulus guard.  With that, the bet on lower yields is being reversed, not just in the U.S., but in Europe and Japan.

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