Investors need to contend with not only what the intermarket signals are telling them, but also the potential tail risk events that could significantly add to volatility and change conditions quickly. Japan, in my opinion, is still the canary in the coal mine. It’s getting tougher to make the argument that the Fed will cut interest rates this year. Friday’s move higher in Treasuries shows that the flight to safety trade is still very much a possibility.

If the Fed is looking for reasons to cut rates later this year, the economy sure isn’t helping. Japan seems to be having much more trouble remaining in control of interest rates, the yen and future policy. Thursday’s market action was particularly noteworthy because it reintroduced volatility and resulted in a fairly risk-off move. Tail risks appear to be getting bigger and more realistic.

The uncommon strength in the traditionally defensive assets is signaling some trouble below the surface. The Fed may want to take an “if it ain’t broke, don’t fix it” mentality in the hopes that it can keep steering towards the soft landing, but I think the action in gold here is pretty telling. The further the yen falls here, the greater the chance that something could break.