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Japan's revolutionary, mass helicopter drop of yen is happening on the other side of the planet but the positive effects are being felt here in Canada by investors in domestic bank stocks.
The key is European bond yields. We're going to have to be very, very careful about correlation and causation here, but the theory looks like this: Faced with low interest rates and devaluation of the yen, Japanese investors are moving assets offshore – notably into peripheral Europe – in search of yield. This has depressed bond spreads which, as we've noted before, helps drive Canadian bank stocks higher.
What can be proven? Government data shows that Japan's buying of foreign bonds has surged – more than a quarter trillion yen ($2.8-billion U.S.) last week alone. Also, the spread between Italian and Spanish bonds versus Germany (a measure of financial stress in the euro zone) have declined by 60 and 107 basis points respectively since the beginning of the year. We are not suggesting that Japanese investment is the sole reason for the peripheral euro bond rally, just that it seems a bit much to be a total coincidence.
In the case of domestic banks, not only does the connection between the performance of the S&P/TSX Bank Index and peripheral bond spreads in Europe remain extremely high (daily R of 0.85 since beginning of 2012), but it also appears that the bond spreads lead performance of the domestic banks.
Admittedly, there is no obvious fundamental connection between Canadian banks and European sovereign debt – domestic banks do not have visibly significant financial exposure to the continent. But in the wake of the 2008 financial crisis, all global bank stocks are sensitive to global credit conditions.
Readers can decide for themselves whether the link between Japan's monetary explosion and domestic banks is real or not. I think it is, at least partially, and for now – which means that Canadian bank investors owe Japanese Prime Minister Shinzo Abe a vote of thanks.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB.