Could this be the Market Mini Meltdown Before 'The Big One' Hits?

Yesterday was a doozy, wasn’t it? Where to start?

The Aussie dollar fell below 97 cents. The ASX200 fell more than 100 points, or around 2%. The Nikkei collapsed over 7%, after starting the day rallying mindlessly. The index experienced a 1,000+ trading range. We also heard that China’s manufacturing sector tipped back into recession, and that Ford won’t be making cars in Australia any more.

Standby for a Paul Krugman article crying out that central banks are not doing enough…

Meanwhile, US markets seemed to benefit from the flight of global capital away from just about everywhere else. The major stock indices held up pretty well overnight in comparison to the panic going on elsewhere around the world. But that makes two consecutive days in the red for US stocks now…highly unusual!

You could probably mark Thursday 23 May, 2013 in your diary as the day the central planners lost control. Ben Bernanke’s all things to all people speech on Wednesday US time led to much confusion. Stocks and precious metals first spiked…then sold off, as Bernanke went from the one hand to the other.

But the real issues are in Japan. Government bond yields (JGBs) surged yesterday to 1%, which doesn’t seem like a big deal, but rising yields represent falling bond prices. This is not particularly good news for the Japanese banks that own over 40% of the JGB’s on issue (as at September 2012, anyway).

Those bonds represent an asset on their balance sheet. When prices fall, the mark-to-market value of the bonds falls too, eroding bank equity capital. Perhaps that’s why yesterday was such a tumultuous day for Japanese assets markets. If JGB yields rise too quickly, it will threaten the solvency of the Japanese banking system, which won’t be good for the stock market.

So if the Bank of Japan can gain control of the JGB market again (a big if…it’s a big market to control) and push yields back down, you could well see the Nikkei turn parabolic once more as panic selling turns back to panic buying.

That’s Dan Denning’s view anyway. This morning he said:

‘…weighed against what’s happened in the past three years, we shouldn’t discount the possibility that this (the Japan crash – Ed) is just another blip in the QE-ization of everything.’

So maybe this is just a mini-meltdown before the major one hits?

No one knows of course…but the situation does feel like tectonic plates bumping up against each other…sooner or later it will cause a major earthquake.

As far as we can tell, QE is as much as about creating confidence as ‘creating money’. And Captain Ben Bernanke damaged market confidence with an all over the shop speech the other day. Maybe that’s exactly what he meant to do. To take a little wind out of the speculators sails, so as not to make the market look like a 100% Fed sponsored entity. Which it is…

Greg Canavan
for Markets and Money

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From the Archives…

Multinationals vs. the Nation State
17-05-13 – Sam Volkering

The Federal Reserve Will Panic and Climb Even Higher
16-05-13 – Bill Bonner

Survival of the Most Capital Efficient
15-05-13 ­– Dan Denning

New Australian Home Buyers Aren’t Convinced
14-05-13 – Dan Denning

What Happens When Everyone in the World has Zero Interest Rates?
13-05-13 – Dan Denning

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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