Pro Perspectives 9/27/23





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September 27, 2023

Yields continued to climb today.
With record global government indebtedness, these are high stress levels for the global economy. 
With that, let's revisit the events of June and October of last year.
In June of last year, the mere plan of the European Central Bank ending QE resulted in a blow-out of sovereign bond yields in Europe.  The global tightening cycle was just getting started, and yet Europe was already flashing warning signals of another sovereign debt crisis.  An implosion of European sovereign debt would mean an implosion of the euro (the second most widely held currency in the world), and therefore an implosion in the global economy. 
The ECB called an emergency meeting to plan a response.  They responded with a new plan (same as the old) to buy bonds of the weaker euro zone constituents to defend against "fragmentation" (i.e. an implosion of the euro zone).
That turned the interest rate market, on a dime (and bottomed global stock markets).
The ECB's new plan, aptly named the "Transmission Protection Instrument," was a public acknowledgement that they would rotely exit emergency level policy (raise rates, reduce the size of the balance sheet), while simultaneously manipulating markets to cancel the negative or destabilizing consequences (namely, uncomfortably high sovereign debt yields).
With the above in mind, the sovereign debt market in Europe has now returned to historically vulnerable levels
We should expect the ECB to execute on their plan.
Speaking of vulnerable levels, the Bank of Japan is once again looking at 150 USD/JPY.  This is the level of yen weakness, that proved to be intolerant to the Bank of Japan last October.  
Responsible for this yen weakness was the increasingly divergent monetary policies of Japan relative to the rest of the world (mainly, relative to the U.S.).  And related to that, by late October of last year, yields in Europe and the U.S. were trading at new highs of this tightening cycle — creating stress not only for the Japanese currency, but for the global financial system.  
The Bank of Japan intervened in the currency markets, to defend the value of the yen.  That relieved the pressure in markets.
The intervention event turned the interest rate markets (yields fell sharply) and it fueled stock market rallies.