Stocks rise and the yen rises as the Bank of Japan grapples with falling bond prices

SYDNEY/LONDON (Reuters) – Stocks were boosted on Monday as optimism about corporate earnings and China’s reopening fueled concerns that the Bank of Japan may ease its outsized stimulus policy at a pivotal meeting this week, while on holiday in China. US markets made for weak trading.

The yen rose to its highest level since May after rumors spread that the Bank of Japan may hold an emergency meeting on Monday as it struggles to defend the new yield ceiling in the face of aggressive selling. Read more

This was the domestic markets in an anxious mood, Japan’s Nikkei index (.N225) It fell 1.3 percent to its lowest level in two weeks.

However, MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) It rose 0.27%, with hopes for a quick reopening of China giving it a 4.2% gain last week.

European stocks opened positively with the STOXX 600 (.STOXX) It was up 0.1% by 0850 GMT, propelled by healthcare stocks (.SXDP) which gained 0.6%.

British benchmark FTSE index (.FTSE) Close to a record high of 7,903.50 set in 2018, banks and life insurance companies were among the biggest gainers.

Earnings season ramps up this week with Goldman Sachs (GS.N)Morgan Stanley (MS.N) and Netflix (NFLX.O) Among these reports.

World leaders, policymakers and CEOs will attend the World Economic Forum in Davos, and there is a group of central bankers speaking, including at least nine members of the US Federal Reserve.

The Bank of Japan’s two-day official meeting ends on Wednesday and speculation is rife that it will make changes to its Yield Curve Control (YCC) policy given the market pushed 10-year yields above their new 0.5% cap. Read more

The Bank of Japan bought nearly 5 trillion yen ($39.12 billion) of bonds on Friday in the largest daily operation ever, yet the 10-year yield still ended the session higher at 0.51%.

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

“There is still some possibility that market pressure will force the Bank of Japan to further adjust or exit the YCC,” JPMorgan analysts said in a note. We cannot ignore this possibility, but at this stage we do not consider it a major scenario.”

They added that “although domestic demand has begun to recover and inflation continues to rise, the economy is not warming up to the point where it can bear the sharp rise in interest rates and the potential risks of a significant appreciation of the yen.”

Yen not installed

The Bank of Japan’s Uber-easy policy acted as a kind of anchor for yields globally, while dragging the yen lower. If this policy is abandoned, this will put upward pressure on yields across developed markets and will most likely see the yen strengthen.

The dollar has been undermined by lower US bond yields as investors bet that the Federal Reserve could be less aggressive in raising interest rates given that inflation is clearly behind the corner.

The Japanese yen rose to a seven-month high against the dollar on Monday, as market sentiment was dominated by expectations that the Bank of Japan will make further adjustments to its yield control policy or abandon it altogether.

The yen jumped about 0.5 percent to 127.215 per dollar, before retreating to 128.6 by 0915 GMT.

The dollar index, which measures US unity against a basket of major currencies, recovered from a 7-month low touched earlier in the session at 102.6.

Futures now point to almost no chance that the Fed will raise interest rates by half a point in February, and a quarter point move is seen as a 94% probability.

The 10-year Treasury yield is down at 3.498%, after falling 6 basis points last week, near its December low and a key chart target of 3.402%.

The easing of global supply bottlenecks in recent months has been a shock to inflation, which increases the chance of a soft landing for the US economy, said Alan Ruskin, global head of G10 foreign exchange strategy at Deutsche Securities.

“A lower inflation rate itself encourages a soft landing through real wage gains, by allowing the Fed to stall more easily and by encouraging a better-behaved bond market, with spillovers for financial conditions,” Ruskin said.

“A soft landing also reduces tail risk from rising US interest rates, and this lowering of the risk premium helps global risk appetite,” Ruskin added.

Commodity prices, which had risen last week, fell on Monday.

The decline in revenues and the dollar benefited from the price of gold, which jumped 2.9 percent last week, but the precious metal fell 0.4 percent to $ 1911 an ounce in early trading on Monday.

Oil prices fell as a rise in COVID cases clouded the prospects for increased demand as China reopens its economy.

Brent crude fell 73 cents, or 0.83 percent, to $84.57 a barrel by 0857 GMT, while US West Texas Intermediate crude fell 61 cents, or 0.6 percent, to $79.24 a barrel.

($1 = 127.8000 yen)

(Reporting by Wayne Cole and Lawrence White) Editing by Shri Navaratnam and Emilia Sithole Mataris

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