The Daily Prophet: Now the Yen Has Markets on Edge

Connecting the dots in global markets.

Financial markets have calmed somewhat following a wild ride last week when assets from stocks to junk bonds, and emerging markets to U.S. Treasuries got slammed. But it's too early to sound the all clear, if Japan's yen is any guide.

The Japanese currency gained on Tuesday to its strongest against the dollar since November 2016, and is trading at its highest levels in 11 weeks against a basket of other major currencies. The yen is a traditional haven for traders in times of stress, largely because of a sizable current-account surplus that doesn’t make Japan reliant on foreign capital. Maybe the yen's strength was a sign of pent-up demand as traders in Japan returned from a holiday, or maybe it's the flip side of broad dollar weakness. There's also the possibility that the gains stem from traders reversing carry trades where they borrowed cheaply in yen and used the funds to finance trades in higher-yielding, riskier assets elsewhere in the world. But if that's that case, it could be a sign that traders don't see the turmoil in financial markets easing anytime soon.


Whatever the reason for the yen's strength, Japanese authorities appear to be getting nervous. The Nikkei reported Tuesday that Japan's foreign-exchange chief, Vice Minister for International Affairs Masatsugu Asakawa, told reporters he’s watching the currency market to see whether there’s speculative activity behind the yen rise. Japanese officials have used similar language in the past before intervening to weaken the yen.

STOCK VALUES ARE A MATTER OF PERSPECTIVE
The question of whether stocks are cheap or expensive is much like the one about beauty: It's all in the eye of the beholder. Both bulls and bears can make a convincing argument that equities are either under or overpriced. On Monday, the strategists at Bloomberg Intelligence said the recent selloff in the S&P 500 left the gauge trading at 16.5 times forecasted earnings, a level last recorded in early November 2016 before the U.S. elections. Now comes Leuthold Group, whose Leuthold Core Investment Fund has beaten 89 percent of its peers over the past five years. After dividing U.S. equities into 10 groups by median market capitalization, the firm found that not only is the whole market trading at valuations exceeding the long-term average, it’s arguably worse than in February 2000, just days before the Nasdaq Composite Index made its bubble-era high, according to Bloomberg News' Elena Popina and Sarah Ponczek. At about 23 times earnings, the multiple in the biggest market-cap decile now is basically identical to then. For so-called mid caps, the gap is even wider at 26 times current, versus 15 in 2000. The smallest stocks fetched 10 times annual profit then, versus 20 now.


A COMING DEBT HANGOVER?
Think the selloff in the bond market is a non-event limited to wealthy Wall Street traders? We may be about to find out, as the slump raises borrowing costs for American households whose outstanding debt climbed to an all-time high of $13.1 trillion in the fourth quarter, according to data released Tuesday by the Federal Reserve Bank of New York. It marked the fourth straight quarter in which borrowing reached a record, Bloomberg News' Vince Golle reports. Debt balances increased from the previous quarter in all but one category, including a 3.2 percent gain in credit-card borrowing that was the second-largest since 2007 and a record level of auto loans. At the same time, 7.55 percent of credit-card balances were in serious delinquency -- those 90 days or more past due -- the highest since the first quarter of 2016, while the 4.05 percent delinquent share of car loans was the biggest since 2012. The overall share of 90-day delinquent loans fell to 3.12 percent from 3.19 percent on declines in the levels for mortgages and student loans. Maybe the surge in measures of consumer sentiment may start to fall back in coming months, damping spending and curbing growth.


POLITICAL RISK HITS THE SHEKEL
Israel's currency was one of the stars of the foreign-exchange market in 2017, gaining more than 10 percent in its best year on record. Lately, though, the shekel has had a bit of reversal of fortune, falling more than 4 percent since peaking on Jan. 26. The outlook isn't so hot following the news that Israel police recommended charging Prime Minister Benjamin Netanyahu with bribery, fraud and breach of trust in two separate cases. Police say they found evidence Netanyahu traded his influence for favors, a non-binding conclusion that Attorney General Avihai Mandelblit will weigh as he decides whether to file charges against a sitting Israeli premier for the first time, according to Bloomberg News' David Wainer. Netanyahu, who survived two prior police recommendations to indict him, has denied any wrongdoing. “We might see some political turmoil, but I think the government is quite stable,” Eran Vigoda-Gadot, a political science professor at the Haifa University, told Bloomberg News. Netanyahu’s political base is very loyal, and “they’ll say ‘So what if he took some gifts and some money? He’s a brilliant English speaker who knows how to represent us in the world stage.’”


ALUMINUM GRABS THE COMMODITIES SPOTLIGHT
The rebound in base metals is leaving one key player in the dust: aluminum. Fears of oversupply spooked the aluminum market Tuesday as the level of stockpiles measured by the world’s largest metals bourse surged the most in almost three decades. The price of aluminum sagged, as data showed a 14 percent jump in inventories and metal flooding into depots in Asia, where most of the biggest consumers are based, Bloomberg News' Mark Burton reports. The move raises concern that Chinese plans to tackle pollution by closing smelters won’t be enough to end a glut of the metal used in everything from airplane fuselages to drinks cans. Optimism over China’s proposals and a slide in inventories helped push aluminum prices up 34 percent last year, the most of any industrial metal on the London Metal Exchange. Republican lawmakers cautioned President Donald Trump in a White House meeting Tuesday against levying tariffs on steel and aluminum imports, warning that it would raise prices of the metals and potentially cost the U.S. jobs in other industries including car manufacturing.


TEA LEAVES
In what is perhaps the biggest piece of economic data since the U.S. jobs report on Feb. 2 that is having an impact on markets, the Labor Department on Wednesday will release its measure of inflation for January. Bloomberg News' Katia Dmitrieva reports that the core CPI, which excludes food and energy, rose 1.7 percent in January from a year earlier, compared with 1.8 percent in December, according to the median projection of economists surveyed by Bloomberg. Viewed another way, inflation may be higher: A 0.2 percent monthly rise in the same index, as economists forecast, would result in a three-month annualized rate of 2.3 percent, according to analysts at Wells Fargo. That would match the fastest pace since February 2017. The threat of higher interest rates after strong job and wage figures on Feb. 2 sent Treasury yields soaring and started a rout in equities that pushed them into the first correction in two years.

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