Japan’s worst 10-year auction in three years sent yields spiking across the curve and, indeed, around the world. As the BoJ’s stealth taper comes out of the shadows, JGB’s rose 6 bps and the 2s10s steepened about 6 bps. German bunds rose 5 bps while UK gilts rose 7 bps and US 10Ys rose about 6 bps.
Not only did the BoJ suggest it will slash purchases going forward, the GPIF said it would shift as much as 1.3 trillion in future bond purchases to FX-hedge foreign bonds.
The yen weakened on the news, which was enough to provide at least a temporary boost in the Nikkei and US futures. But, our charts still show a very sharp drop in TNX directly ahead, a case now strengthened by the GIPF’s shift in allocation.
If a reduction in QE causes stocks to rally, it would portend a seismic shift in central bank intervention and a resumption of the currency race to the bottom. The only problem: the world can ill afford higher interest rates or even steeper yield curves. I remain bearish.
continued for members…
ZN is testing its channel bottom again, but should hold. TNX’s bump should be faded.
Our SPX targets remain unchanged. Though SPX should break out of the small falling white channel on the open.
The risk to our downside case is that SPX and ES are both positioned to complete small IH&S Patterns: ES at 2994.80 and SPX at 2986ish. A moment of truth for both…
The USDJPY bump is offering stocks substantial help as we approach the open. The question is whether the bump can last and whether it will offset weakness in oil.
Dollar strength is carrying through in the EURUSD as well. 
Oil is sitting at yesterday’s lows still looking very vulnerable to me.
VIX is dipping below its latest TL on this development, but it’s responding to the USDJPY-fueled pop rather than leading the way.
Sep PMI is coming up.
UPDATE: 10:08 AM
Manufacturing PMI came in at 47.8 versus expectations of 49.5. This is the worst reading since June 2009. 
Not surprisingly, stocks seem to feel this is more important than a manufactured yen weakening.
UPDATE: 1:10 PM
SPX just closed its gap from Aug 13. This is a logical place for a bounce, though I don’t expect it to do so or, if it does, for the support to hold. There are multiple potential bounce spots below here.
CL is still breaking down.
Though, USDJPY has ground to a halt. 
Keep an eye on VIX, which is about to break out.
ES’ chart illustrates the H&S targets at 2931 and 2890.