The Reverse Carry Trade Remains In Play

Cracks Emerge In Japan's Banking Sector

Market breadth improved modestly last week to include some smaller stocks and cyclicals, but overall relative strength still belongs to the growth sectors. Lower than expected PMI readings in multiple global markets demonstrate that the risks of a more significant downturn remain elevated. A 9% drop in lumber prices last week to their lowest levels in more than a year suggests that the biggest risks are coming from the manufacturing space. That’s not surprising given the weakness we’ve seen over in Asia, but softening consumer spending at the same time could mean that there’s no real support to be had for the global economy if something gets pushed over the edge.

That “something” could end up being the Japanese financial sector. Japanese bankruptcy filings are at 12-year highs and news that Norinchukin Bank is planning on dumping more than $60 billion in sovereign bond holdings in order to cover outstanding bond losses could put pressure on bond yields as well. So far, the Treasury market has been able to withstand the potential problem of the BoJ and Japanese banks dumping U.S. government debt supply into the marketplace, but there’s risk when recent Treasury auctions have shown a less than enthusiastic appetite on the street.