A banking crisis radiating out from Europe?
While China, Hong Kong, and some other Asian markets celebrated the lunar New Year and wisely kept their markets closed, all heck is breaking loose in Japan.
The Nikkei had risen 1% on Monday and was down “only” 18.8% from its recent high in June 2015, thus dodging not only the rout of most other markets that day but also the ignominious fate of being pushed, like so many other markets, below the blue line in my infamous Global Bear-Market Progress Report. The blue line indicates a decline of 20% or more. But that was like so yesterday.
Today, the Nikkei plunged 919 points or 5.4%. It’s now down 23.1% from its recent high, in a solid bear market. Fears about global growth coagulated with fears about a banking crisis radiating out from Europe, and particularly its epicenter, Deutsche Bank.
So Japan’s four systemically important megabanks that will not be allowed to implode if at all possible got totally smoked today, and have gotten crushed since their highs last year:
- Mitsubishi UFJ Financial Group plunged 8.7%, down 47% from June 2015.
- Mizuho Financial Group plunged 6.2%, down 38% since June 2015.
- Sumitomo Mitsui plunged 6.2%, down 26% since May 2015
- Nomura plunged a juicy 9.1%, down 42% since June 2015
Hedge funds, particularly US hedge funds, that once had plowed into Japanese equities including the banks, hoping that Abenomics would perform miracles, have abandoned the cause. Japan’s Government Pension Investment Fund, upon the urging of the Bank of Japan, sold its mainstay investment, Japanese Government Bonds, to the Bank of Japan and loaded up with equities instead. This process is now mostly finished, and it too stopped buying equities. Other pension funds did the same. The artificial demand for stocks is dead. Now pension funds are left with stocks that have plunged.
And the megabanks are now trading at less than half the book value of their assets. But this book value of assets, as was learned during the Financial Crisis, can go up in smoke without prior notice.
In the credit rout rippling out from Europe, the costs of insuring Japanese corporate bonds against default surged to the highest level since June 2013, according to Bloomberg. And investors fled from corporate bonds and equities into government debt.
So Japanese Government Bonds became a safe haven of last resort, and they soared, and yields dropped into the negative. People were willing to pay for the privilege of owning them, with all maturities below 10 years sporting a negative yield.
But that too is like so yesterday. Today the 10-year yield too fell into the negative, for the first time ever. Now at -0.02%, driving the negative-yield absurdity to ever greater heights.
Negative yield up this far the yield curve is shaking the financial house of cards. For banks trying to make money or even break even on loans in a negative yield environment is an absurd endeavor.
And the yen has jumped again today, taking Japan’s carefully orchestrated currency war and tangling it up in contradictions and nuances of failure. Beating down the yen, manually if it had to, has been one of the big strategies of Abenomics. The idea was to allow Japan Inc. to increase exports and enhance the paper profits on activities and investments overseas, even if the resulting higher prices of imports would knock the wind out of household finances. At the end of January, it still took 122 yen to buy a dollar; now it takes 114.8. It rose 6% in a little over a week!
That’s a big embarrassment for the financial regime. So Finance Minister Taro Aso came out on Tuesday to express his displeasure. “The markets have shown rough movements lately. That is clear,” he said at a news conference when asked about the yen. So he’s “going to continue to closely watch foreign-exchange movements.”
Now if the Bank of Japan really wants to spook the markets, crash stocks, and speed up the toppling of the banks, it could just increase its QQE and push yields deeper into the negative, as some economists are already clamoring for. That would likely do the job.
And there’s a bitter irony. Read… Negative-Interest-Rate Effect already Dead, Central Banks Lost Control over Stocks