Markets

Asian shares inch higher, BOJ struggles with bonds

  • https://tmsnrt.rs/2zpUAr4
  • BOJ under intense pressure as it defends yield policy
  • BOJ capitulation could lift yen, hurt global bonds
  • More earnings to come, many central bank spokespeople say

SYDNEY, Jan 16 (Reuters) – Asian shares rose on Monday as investors nervously waited to see whether the Bank of Japan (BOJ) would defend its massive stimulus policy at a key meeting this week, while a holiday in U.S. markets made for thin trading.

There have been rumors that the BOJ could hold an emergency meeting on Monday as it struggles to defend its new yield ceiling in the face of massive selling. In more detail

That left markets worried, with Japan’s Nikkei (.N225) falling 1.0% to a two-week low.

MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) was still up 0.5%, with hopes of a quick Chinese reopening giving it a 4.2% gain last week. China’s blue-chip index (.CSI300) also rose 0.6%.

EUROSTOXX 50 futures added 0.6%, while FTSE futures added 0.1%. S&P 500 futures and Nasdaq futures were flat, following a rejection on Wall Street last week.

Earnings season ramps up this week with Goldman Sachs, Morgan Stanley and the first big tech name, Netflix, among those reporting.

World leaders, policymakers and top corporate chiefs will attend the World Economic Forum in Davos, and a host of central bankers will speak, including at least nine members of the US Federal Reserve.

The BOJ’s official two-day meeting ends on Wednesday and there is speculation that it will change its yield curve control (ICC) policy as the market pushed 10-year yields above their new limit of 0.5%. In more detail

The BOJ bought nearly 5 trillion yen ($39.12 billion) of bonds on Friday in its biggest daily operation yet, but yields still ended the session at 0.51%.

Early Monday, the bank offered to buy another 1.3 trillion yen of JGBs, but the yield remained at 0.51%.

“There is still some possibility that market pressure will force the BOJ to further adjust or abandon the ICC,” JPMorgan analysts said in a note. “We cannot ignore this possibility, but at this stage we do not consider it the main scenario.”

“Although domestic demand has started to recover and inflation continues to rise, the economy is not heating up to the point where a sharp rise in interest rates and the potential risk of a large appreciation of the yen can be tolerated,” they added. “Therefore, we believe that the economic environment does not support successive policy changes.”

YEN NOT ANCHORED

The BOJ’s uber-easy policy acted as something of an anchor for yields globally, while dragging the yen. If this policy were to be abandoned, it would put upward pressure on yields in developed markets and most likely lead to a rise in the yen.

The dollar is already at its lowest level since May at 127.67 yen, after falling 3.2% last week and threatening to break major support around 126.37.

The euro also lost 1.5% against the yen last week, but was helped by gains on a much softer dollar, which hit $1.0826 on Monday, just off a nine-month high.

All this sent the US dollar index down to its lowest level since June at 101.98.

The dollar was undermined by falling US bond yields as markets bet the Federal Reserve could be less aggressive in raising rates as inflation appears to have turned a corner.

Futures now imply almost no chance of the Fed raising rates by half a point in February, with a quarter-point move seen as a 94% probability.

Yields on 10-year Treasuries fell 3.51%, after falling 6 basis points last week, near December lows and the chart’s main target of 3.402%.

Alan Ruskin, global head of G10 FX strategy at Deutsche Securities, said the easing of global supply bottlenecks in recent months has proved a disinflationary shock, increasing the chances of a soft landing for the US economy.

“Lower inflation itself encourages a soft landing through real wage gains, allowing the Fed to pause more easily and encouraging better bond market behavior, with a favorable spillover to financial conditions,” Raskin said.

“The soft landing also reduces the risk of much higher US rates, and this reduced risk premium helps global risk appetite,” Raskin added.

Falling yields and the dollar benefited gold, which jumped 2.9% last week to its highest level since April and last traded at $1,920 an ounce.

Oil prices also rose last week on hopes that China’s rapid reopening will boost demand. Data on movement, traffic and transport trips in China showed a sharp pick-up in traffic ahead of next week’s Lunar New Year holiday.

China’s data on economic growth, retail sales and industrial production due this week is sure to be poor, but markets are likely to move into a rapid recovery now that coronavirus restrictions have been lifted.

Prices fell by 31 cents to $84.97 per barrel on Monday, while US crude fell 27 cents to $79.59.

(1 dollar = 127.8000 yen)

Reporting by Wayne Cole; Edited by Sri Navaratnam

Our Standards: Thomson Reuters Trust Principles.

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