- The BOJ is under intense pressure as it defends yield policy
- BOJ capitulation could boost yen, hurt global bonds
- More earnings ahead, lots of central bank spokesmen
SYDNEY, Jan 16 (Reuters) – Asian shares rose on Monday as investors waited nervously to see whether the Bank of Japan (BOJ) would defend its super-sized stimulus policy at a key meeting this week, while U.S. markets were on holiday. for thin trading.
There were 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. read more
That had a jittery mood in markets, 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% on hopes of China’s early reopening, which gave it a 4.2% gain last week. China’s blue chip index (.CSI300) also rose 0.6%.
EUROSTOXX 50 futures added 0.6% and FTSE futures added 0.1%. S&P 500 futures and Nasdaq futures were flat after gains on Wall Street last week.
Earnings season heats up this week with reports from Goldman Sachs, Morgan Stanley and the first major tech name, Netflix.
World leaders, policymakers and corporate executives will attend the World Economic Forum in Davos, and a host of central bankers will speak, including no less 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, given that the market has pushed the 10-year yield above its new 0.5% ceiling. read more
The BOJ bought nearly 5 trillion yen ($39.12 billion) in bonds on Friday in its biggest daily operation on record, but yields still ended the session up 0.51 percent.
The bank offered to buy another 1.3 trillion yen of JGBs early Monday, but the yield remained at 0.51%.
“There is still some possibility that market pressure will force the BOJ to become more accommodative or withdraw from the ECB,” JPMorgan analysts said. “We cannot ignore this possibility, but we do not consider it a main scenario at this stage.”
“Although domestic demand has started to recover and inflation continues to rise, the economy is not heating up to the point where it can tolerate a sharp rise in interest rates and the potential risk of a large appreciation of the yen,” they added. “So we think the economic environment is not very supportive of successive policy changes.”
YEN NOT FIXED
The BOJ’s ultra-easy policy has acted as an anchor of sorts for global yields while dragging down the yen. If it were to abandon policy, it would put upward pressure on yields in developed markets and likely see the yen rise.
The dollar is at its lowest level since May at 127.67 yen, down 3.2% last week, and threatens to break key support around 126.37.
The euro also lost 1.5% against the yen last week, but was helped by a generally softer greenback that settled at $1.0826 on Monday, just shy of a nine-month peak.
All these saw the US dollar index weaken to its lowest since June at 101.98.
The dollar was hurt by falling US bond yields as markets bet the Federal Reserve could be less aggressive in raising interest rates given that inflation has clearly turned around.
Futures now suggest almost no chance the Fed will raise interest rates by half a point in February, with a quarter-point move seen as a 94% chance.
The 10-year Treasury yield fell 3.51%, down 6 basis points last week, near the December mark and a key chart target of 3.402%.
Alan Raskin, global head of G10 FX Strategy at Deutsche Securities, said the easing of global supply bottlenecks in recent months suggests a disinflationary shock, raising the possibility of a soft landing for the US economy.
“Low inflation itself encourages a soft landing through rising real wages, allowing the Fed to stop more easily and encouraging better bond market behavior with favorable spillovers on financial conditions,” Ruskin said.
“The soft landing also reduces the tail risk of much higher US interest rates, and this reduced risk premium helps global risk appetite,” Ruskin added.
The fall in yields and the dollar helped gold, which rose 2.9% last week to its highest since April and last traded at $1,920 an ounce.
Oil prices also rose last week on hopes that China’s rapid reopening would boost demand. Data on mobility, traffic and transport trips in China showed a sharp pick-up in traffic ahead of the Lunar New Year holiday next week.
China’s data on economic growth, retail sales and industrial output due this week is sure to be dismal, but markets are likely to look at a quick recovery now that coronavirus restrictions have been lifted.
Prices eased again on Monday, with Brent down 31 cents to $84.97 a barrel, while U.S. crude fell 27 cents to $79.59.
($1 = 127.8000 yen)
Reporting by Wayne Cole; Editing by Sri Navaratnam
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