Ok, so Microsoft bought LinkedIn. If you picked up some LNKD back in February after the disastrous Q4 call, good for you.
Now that we got that out of the way, let’s talk about the trends driving markets on Monday because understanding the ebb and flow here is going to be critical over the next two weeks.
First of all, it was a bloodbath in Asia overnight as stocks crashed more than 3% in China, Japan, and Hong Kong. If you’ve followed our recent commentary you can probably name the culprit. 
That’s right folks, a surging yen which is getting dangerously close to level at which some expect Japan to intervene directly to curb what Finance Minister Taro Aso recently called “excessive” strength. Note also the amusing selloff at precisely the moment stocks opened for trading in the US. That’s no accident.
“I’m waiting for U.S. Treasury Secretary Lew to call up the Japanese and implore them to intervene in the yen,” Bloomberg’s Richard Breslow quipped this morning. “Orthodoxy will go right out the window if equities are threatened.”
For those who need a refresher on the dynamic, see here and here. Suffice to say investors are skittish for a number reasons and the yen is still considered a safe haven currency despite the fact that Japan is quite possibly headed for harakiri by debt and demographics.
But think about what else is going on here, because it’s important. You’ve got the Fed and the Bank of Japan this week and before the May jobs print came in so unabashedly horrible, it looked like the BoJ was going to get a free pass. A kind of easing by default. The Fed would hike and the yen would move lower even if the BoJ didn’t do anything.
Now, the calculus has changed. With the Fed likely to stand pat and quite possibly telegraph a dovish bias going into July’s meeting, the BoJ will face a tough choice. The “right” move (i.e. the move that would drive the yen lower) would be to ease further either by expanding ETF purchases or taking rates further into negative territory. But recall that when Japan took rates below zero in late January, they got the opposite of their intended effect - the yen rose and stocks fell as investors interpreted the move as a tacit admission that everything else the Bank of Japan has tried has failed. Here’s Citi’s take on this week’s meeting:
“Regarding the financial market reaction to negative interest rates introduced on January 29, JGB yields probably declined more than policymakers had expected while the ¥/$ rate (and stock prices) went against their intended direction. We thus believe the BoJ will definitely try to avoid inviting a similar reaction from the FX market next time.
“From this perspective, the FOMC meeting scheduled on June 14-15, just ahead of the BoJ meeting, will be an important event, in which the Fed looks likely to deliver neither a rate hike nor any concrete clues as to the timing of the next hike. In this scenario, US monetary policy would be unlikely to exert upward pressure on the yen. In addition, the UK referendum on EU membership is scheduled to take place on June 23. The Leave camp has been gaining momentum in recent polls, apparently taking the financial markets toward risk-off mode. Even if the BoJ eases policy this week in this context, the impact would most likely be offset by these external factors and the possibility of further yen appreciation could not be ruled out.”
In layman’s terms: damned if they do and damned if they don’t.
So what if the Fed surprises markets and hikes despite the jobs number? What does that mean for the yen and for US equities? Well, thanks to Goldman we know. Here’s a look at what history shows:
(Chart: Goldman)
In short: equities sell off while the yen gets a break.
If you’re following the narrative you might notice that this would seem to suggest US equities sell off either way. Either due to a policy shock or to a strengthening yen.
Of course one never really knows these days but the above should be food for thought. And on that note, we’ll close with a chart from Citi which seems to suggest that the time for intervention by Japan is nigh based on the 3-year moving average:
(Chart: Citi)
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