- The BOJ is under intense pressure to defend yield policy
- Yen hits 7-month high, yuan rises as dollar falls
- More earnings, more Fed speakers
- Britain’s FTSE flirts with record high
SYDNEY/LONDON, Jan 16 (Reuters) – U.S. markets made for softer trading as stocks firmed on Monday as optimism over corporate earnings and China’s restart offset.
The yen rose to its highest since May on rumors the BOJ may hold an emergency meeting on Monday as it struggles to defend its new yield ceiling in the face of a massive selloff. read more
This left local markets in a worried mood, including Japan’s Nikkei (.N225) It fell 1.3% to a two-week low.
Nevertheless, MSCI’s broadest index of Asia-Pacific shares excludes Japan (.MIAPJ0000PUS) It added 0.27%, giving it a 4.2% gain last week on hopes of a swift Chinese reopening.
Britain’s benchmark is the FTSE index (.FTSE) In 2018 it was close to a record high of 7903.50, with banks and life insurance companies being the biggest gainers.
World leaders, policymakers and top corporate leaders will attend the World Economic Forum in Davos, and a host of central bankers are speaking, including no fewer than nine members of the US Federal Reserve.
The BOJ’s official two-day meeting ends on Wednesday and speculation is rife that it will make changes to its yield curve control (YCC) policy as the market pushes the 10-year yield above its new ceiling of 0.5%. read more
The BOJ bought nearly 5 trillion yen ($39.12 billion) of bonds on Friday.
Earlier on Monday, the bank offered to buy another 1.3 trillion yen of JGBs, but the yield was 0.51%.
“There is still some scope for market pressure to further adjust the BOJ or exit the YCC,” JP Morgan analysts said in a note. “We cannot ignore this possibility, but we do not consider it a major scenario at this point.”
“Although domestic demand has started to recover and inflation continues to rise, the economy has not warmed up enough to tolerate the risk of a sharp rise in interest rates and a large yen appreciation,” they added.
The BOJ’s uber-easy policy is acting as a kind of anchor for yields globally, while undermining the yen. If policy is abandoned, it will put upward pressure on yields in developed markets and most likely see the yen rise.
Falling U.S. bond yields weakened the dollar as investors bet the Federal Reserve could be less aggressive in raising rates as inflation clearly turned the corner.
The Japanese yen rose to a more than seven-month high against the dollar on Monday, as market sentiment was dominated by expectations that the BOJ would make further changes to its yield control policy or abandon it altogether.
The yen rose roughly 0.5% to 127.215 to the dollar, having traded at 128.6 by 0915 GMT.
The dollar index, which measures the US unit against a basket of major currencies, rebounded from a 7-month low touched earlier in the session to 102.6.
Futures are now unlikely to raise rates by half a point in February, with a quarter-point move seen as a 94% probability.
The yield on 10-year Treasuries fell to 3.498%, down 6 basis points last week, near its December trough, and a key index target of 3.402%.
Alan Raskin, global head of G10 FX strategy at Deutsche Securities, said the easing of global supply constraints in recent months has proved an inflationary shock, increasing the likelihood of a soft landing for the US economy.
“Lower inflation is encouraging a soft landing through real wage gains, by allowing the central bank to pause immediately and encouraging bond markets to favor financial conditions,” Raskin said.
“The soft landing also reduces the tail risk of higher US rates, and this reduced risk premia helps global risk appetite,” Raskin added.
Commodity prices fell on Monday after rising last week.
Falling yields and the dollar benefited gold prices, which rose 2.9% last week, but the precious metal fell 0.4% to $1,911 an ounce in early trade on Monday.
Oil prices fell as a surge in COVID cases dimmed prospects for a pick-up in demand as China reopens its economy.
Brent crude was down 73 cents, or 0.83%, at $84.57 a barrel by 0857 GMT, while US West Texas Intermediate CLc1 was down 61 cents, or 0.6%, at $79.24.
($1 = 127.8000 Yen)
Reporting by Wayne Cole and Lawrence White; Editing by Sri Navaratnam and Emilia Sithole-Madaris
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