After Holiday Weekend, Market Volatility Could Increase

 | May 28, 2013 07:25AM ET

Abenomics will struggle to control a jump in government bond yields. The currency gained against most of its trading counterparts even after Haruhiko Kuroda, Bank of Japan Governor, faced the media to say that Japan could cope with rising interest rates. As bond yields gained, the cost of shorting yen has increased significantly and may yet spark a more aggressive strengthening of the yen. With markets in the U.S. and the U.K. closed yesterday we may see more volatility as these markets reopen this evening. The Yen has weakened more than 17% in the last six months so the magnitude of a reversal could be significant. USDJPY opens the morning hovering around 101.00.

Meanwhile in China, there are increasing signs that the leadership of President Xi Jinping is willing to tolerate a slowdown in China in favour of protecting the environment and may yet avoid the type of stimulus programmes that have been embraced by central banks across the world. The State Council, which is headed by Premier Li Keqiang, has approved a series of tac reforms to revamp the economy. Increased pressure on the labour market and rising local government debt burdens across the nation are forcing the new administration to push through reforms to avoid what some are fearing will be an inevitable hard landing for the world's second largest economy.

Markets in both the U.S. and the U.K. where closed for public holidays so limited liquidity saw relatively muted trading con-ditions overnight. European markets recovered form their first weekly loss in over a month as technology stocks claimed. The Stoxx Europe 600 index gained 0.3% and volumes were more than 60% lower than the average of the last month in quiet conditions. SAP, the world's largest maker of business management software, gained more than 2% on acquisition news. The DAX gained 0.94% while the CAC 40 rose 0.97%.