The Bank of Japan offered to pump ¥8,000bn ($98bn) into the banking system on Tuesday, following a record ¥15,000bn ($182bn) auction on Monday. The offer in same-day market operations drew bids of ¥5,400bn ($66bn).

But the Bank can do little directly to slow the rapidly falling stock market, which is reducing companies’ market capitalisation so significantly and so rapidly it imperils some companies’ survival and could lead to a credit crunch. Finance Minister
Yoshihiko Noda tried to counter this yesterday by saying the factors behind the fall were “temporary”.

The Bank is prohibited from buying shares directly. There are rumours that it might intervene in currency markets, however, to weaken the yen. (A strengthening yen necessarily reduces the number of yen per stock.) Yesterday there was at one point a spike in the dollar – apparently the result of a one-off trade. Mr Noda declined to comment. Read more

Robin Harding

Yes it does, according to a new working paper from a group of Chinese and Swiss academics, published as a preprint.

Using both monthly and weekly data, we found very similar lead-lag dependence between the S&P500 stock market index and the yields of bonds inside two groups: bond yields of short-term maturities (Federal funds rate (FFR), 3M, 6M, 1Y, 2Y, and 3Y) and bond yields of long-term maturities (5Y, 7Y, 10Y, and 20Y)….First, the stock market and yields move in the same direction. Second, the stock market leads the yields, including and especially the FFR.

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US traders get more excited about the Fed’s decisions than their European counterparts do about those of the ECB, and no-one knows why.

This from a research paper by Magnus Andersson at the ECB. The research finds, perhaps unsurprisingly, “intraday US and euro-area stock and bond market volatility strongly increases at the time of the release of monetary policy decisions”. But more so in the US than in Europe. Why?

Tentative explanations from the author include the difference in information released, the differing mandates of the two central banks, and timing uncertainty in the Fed’s releases. However, overall, “the observed discrepancy between asset-price reactions in the United States and in the euro area following monetary policy decisions still remains a puzzle.”

What else does this gem of a paper contain? Three conclusions: Read more

Gilts down, sterling down and UK equities down. These things have followed news of a hung parliament in the UK, but there is plenty more bearish news out there to spook the markets. For example: (1) Yesterday’s record 1000-point intraday drop in the Dow, due to a clerical error or some massive sales, depending whom you believe; (2) Fears of further sovereign debt crises in Europe, where equities have been falling for days; and (3) Japan’s decision to inject $21.6bn overnight liquidity — using a crisis-era tool last used (to this extent) in late 2008.

Much talk today of ‘risk contagion‘ as share prices continue to fall sharply across the world. Equities have been falling since the start of the year, but declines over the past two days have been sharp, between 3 and 5 per cent. Analysts are blaming growing fears over sovereign debt in Greece and Portugal – as measured by still-widening credit default swap spreads – and falling confidence in sovereign debt generally.

US markets were not helped by an unexpected rise in first-time unemployment claims yesterday, and today’s US non-farm payroll data is nervously awaited. Read more

Taiwan plans to set a limit on the total value of securities Chinese investors can buy under new rules due to come into force on Saturday.

Wu Tang-chieh, deputy chairman of the Financial Supervisory Commission, told this to Bloomberg but did not provide a figure and would not comment on a report in the Commercial Times that the central bank is proposing a ceiling of $500 million shares in Taiwan-listed companies. The ceiling in the current memorandum is $1bn. Read more

Part of the Chinese central bank has scrapped a controversial proposal to allow Chinese citizens to buy shares listed in Hong Kong. The State Administration of Foreign Exchange, a body under the central bank, said the potentially groundbreaking proposal was one of 19 documents that were invalid as they had expired. The Taiwanese will be paying close attention: they want to limit stock purchases by Chinese citizens under new rules due to come into force on Saturday.

Short-term interest rates in the US have turned negative. This might mean imminent disaster or it might be traders chasing safe investments as they look to secure end-of-year profits – choose between numerous explanations.

There are also competing explanations for the rise in US mortgage delinquency rates. Most of the rise is in people who are extremely late on their payments, rather than just a little: Read more

This might seem like a currency special edition. The dollar fell after China hinted at renminbi appreciation. The People’s Bank of China said foreign exchange policy would take into account “capital flows and major currency movements”, a pointed reference to US dollar weakness and the large speculative inflows of capital that China is receiving. Those speculative inflows are a growing concern for many emerging markets, whose currencies are rising quickly: Taiwan, Russia, Brazil, Thailand and Chile are all planning how best to slow the influx of capital.

Dollar reserves have been going out of fashion over the past few months, and now two IMF economists have called for diversification away from the greenback. This will make Geithner’s (widely mocked) ‘commitment’ to a strong dollar even harder to achieve. Read more

More than half of all children in the US will use food stamps at some point, predicts new research. Equities fall sharply in the UK and Europe, in spite of strong manufacturing data, amid fresh concerns about mortgage-backed securities and the possibility of a second round of stimulus in the US Read more

Japan prepares to unwind part of its stimulus package as the IMF warns the country’s debt path is out of control, raising a “real risk” that the country could end up in default. Further echoes of the start of the crisis, as CIT files for bankruptcy, an analyst cautions of further Citi write-downs, and concerns about commercial real estate spread across the Atlantic Read more

China, India and Australia should all consider tightening monetary policy, says the IMF. Emerging economies show healthy signs, as US legislators fight to keep the house market moving, against falling prices, credit warnings and reduced mortgage applications Read more

Decoupling? Asian economies discuss increasing intra-regional trade that is less dependent on exports to the West. Conflicting indicators from the US and warnings of bubbles in the UK Read more

Money Supply, a Financial Times blog, wraps up the news for Wednesday, October 21 Read more

Money Supply, a Financial Times blog, rounds up the news for Monday, October 19 Read more

Money Supply, a Financial Times blog, rounds up the news of Friday, October 16 Read more

Money Supply, a Financial Times blog, wraps up the news of the day for Thursday, October 15 Read more