LONDON- Stocks continued their new
year rally on Monday as optimism over the global economy,
inflation coming under control and China’s reopening offset
concerns the Bank of Japan (BOJ) might temper its super-sized
stimulus policy at a pivotal meeting this week.
The yen climbed to its highest since May after rumours
swirled the BOJ might hold an emergency meeting on Monday as it
struggles to defend its new yield ceiling in the face of massive
selling, sending the dollar to a seven-month low.
Yet away from those concerns that the BOJ might be forced to
abandon its decades-long attempt to stoke prices rises in the
world’s third-biggest economy, investor confidence held amid
tentative signs Europe’s recession could be milder than feared.
The region’s STOXX 600 .STOXX benchmark rose 0.3% by 1145
GMT driven by healthcare stocks .SXDP which gained 0.6%, and
Britain’s FTSE at 7856 inched towards a record 7903.
MSCI’s broadest index of Asia-Pacific shares outside Japan
.MIAPJ0000PUS added 0.37%, with hopes for a speedy Chinese
reopening giving it a gain of 4.2% last week.
The fragile rally in equities that has characterised the
opening weeks of the year could be tested from a number of
angles this week, however, as world leaders, policy makers and
corporate CEOs gather for the World Economic Forum (WEF) in
Davos.
Two-thirds of private and public sector chief economists
surveyed by the Forum expect a global recession in 2023, the WEF
said on Monday, in a sign of tougher times ahead for markets.
A host of central bankers is also set to speak this week,
including nine members of the U.S. Federal Reserve.
The BOJ’s official two-day meeting ends on Wednesday and
speculation is rife it will make changes to its yield curve
control (YCC) policy given the market has pushed 10-year yields
above its new ceiling of 0.5%. nL1N33Y02R
The BOJ bought almost 5 trillion yen ($39.12 billion) of
bonds on Friday in its largest daily operation on record, yet
10-year yields still ended the session up at 0.51%.
Early on Monday, the bank offered to buy another 1.3
trillion yen of JGBs, but the yield stuck at 0.51%.
“There is still some possibility that market pressure will
force the BOJ to further adjust or exit the YCC,” JPMorgan
analysts said in a note. “We can’t ignore this possibility, but
at this stage we do not consider it a main scenario.”
THE YEN UN-ANCHORED
The BOJ’s uber-easy policy has acted as a sort of anchor for
yields globally, while dragging down the yen. Were it to abandon
the policy, it would put upward pressure on yields across
developed markets and most likely see the yen surge.
The dollar has been undermined by falling U.S. bond yields
as investors wager the Federal Reserve can be less aggressive in
raising rates, given inflation has clearly turned the corner.
The Japanese yen JPY=EBS rose to a more than seven-month
peak against the dollar on Monday, as market sentiment was
dominated by expectations that the BOJ would abandon or make
further tweaks to its yield control policy.
The yen jumped roughly 0.5% to a high of 127.215 per dollar,
before easing to 128.3 by 1156 GMT.
The dollar index, which measures the U.S. unit against a
basket of major currencies, recovered from a 7-month low earlier
in the session to 102.3 =USD.
Futures now imply almost no chance the Fed will raise rates
by half a point in February, with a quarter-point move seen as a
94% probability. FEDWATCH
Yields on 10-year Treasuries US10YT=RR are down at 3.498%,
having fallen 6 basis points last week, close to its December
trough, and major chart target of 3.402%.
Alan Ruskin, global head of G10 FX Strategy at Deutsche
Securities, said the loosening of global supply bottlenecks in
recent months was proving to be a disinflationary shock, which
increases the chance of a soft landing for the U.S. economy.
“The lower inflation itself encourages a soft landing through
real wage gains, by allowing the Fed to more readily pause and
encouraging a better behaved bond market, with favourable
spillovers to financial conditions,” Ruskin said.
U.S. stock markets were closed on Monday for Martin Luther
King Jr. Day, a national holiday.
Commodities prices which had rallied last week, dipped on
Monday.
The drop in yields and the dollar had benefited the gold
price, which jumped 2.9% last week, but the precious metal
slipped 0.2% to $1,916 an ounce on Monday XAU=. GOL/
Oil prices slid but held near the year’s highs as a rise in
COVID cases clouded the prospects for a surge in demand as China
reopens its economy.
Brent crude LCOc1 fell 25 cents, or 0.29%, to $85.03 a
barrel by 1210 GMT, while U.S. West Texas Intermediate crude
CLc1 was down 14 cents, or 0.18%, at $79.72 a barrel.
Source: ASEAN Exchanges