LONDON/SINGAPORE, Dec 21 (Reuters) – Global shares rose on Wednesday after the Bank of Japan shocked markets by unexpectedly deciding to loosen its tight grip on government bond yields, and the yen posted its biggest one-day gain against the stock market. dollars in 24 years.
The MSCI World Index (.MIWD00000PUS) rose 0.1% on the day, although it is on course for a 4.4% decline in December. This year, the figure is set to fall 8 out of 12 months, a record for the number of monthly losses in a calendar year, second only to 2008.
Stocks in Europe pared some of the previous day’s declines, led by gains in sportswear stocks after Nike ( NKE.N ), the world’s largest sportswear company, beat estimates for quarterly earnings. US index futures rose between 0.5% and 0.6%, suggesting that some of this strength may continue before Wall Street opens.
On Tuesday, the Bank of Japan (BOJ) widened its trading range for the 10-year government bond yield by 25 basis points (bps) from zero to 50 bps.
That sparked a jump in the yen, which has spent most of the year falling on low Japanese yields, as well as a sell-off in Japan’s stock market and bond sales around the world.
The decision by the BOJ, the world’s last bastion of central banking, has raised concerns among investors about how rising interest rates and persistent inflation will affect the global economy.
Fund managers are taking an extremely cautious approach to early 2023 and as such trading conditions are thin and highly volatile.
“We believe that recessions are expected in the US and Europe, but at the moment it is very difficult to measure the amplitude of these declines. This makes it very difficult to estimate the earnings potential for 2023, and therefore also very difficult to make normal judgments about valuations,” Bastien Drout, chief thematic macro strategist at CPR, a unit of Amundi, Europe’s largest asset manager :
“We have taken profits from the November rally and our positions in the stock are quite low,” he said.
The STOXX 600 (.STOXX) rose 0.7%, led by the retail sector, where German rivals Adidas ( ADSGn.DE ) and Puma ( PUMG.DE ) gained 7.6% and 8% respectively. .3%, while British sportswear retailer JD Sports ( JD.L ) gained 6.8%, helping the FTSE 100 ( .FTSE ) gain 0.4%.
The dollar, meanwhile, fell against a basket of major currencies, which in turn pushed gold to six-month highs and boosted crude oil.
The U.S. currency saw its biggest one-day drop against the yen in 24 years on Tuesday, falling nearly 4% after the BOJ said it would allow long-term interest rates to fluctuate more widely. It was at 131.665 against the yen on Wednesday, near its lowest since early August.
Some of the key drivers of the dollar’s rise — an increasingly weak yen, the Chinese yuan’s struggles and the outsized rise in U.S. yields — are beginning to shift. The euro remained steady at $1.0627, not far from last week’s six-month high.
Bond markets remained under pressure as the last major central bank to anchor its bond market begins to loosen its iron grip on yields.
Not only that, but worries that large Japanese investors looking for yield in overseas markets will have to abandon those “real” trades to offset the yen’s rise and bond losses in domestic markets when Aussie and Asian bonds sell off heavily. currencies such as the Singapore dollar.
“There appears to be growing caution about unintended ‘de-risking’ on risky assets,” Mizuho analysts wrote.
Analysts at Citi said the lull in equity markets may not last and things could turn volatile in thin year-end trade.
“Our equity traders warn that the most expensive market risks are roughly how high the level of structural inflation is in the post-COVID world.
“We know the Fed is firmly committed to getting inflation down to 2% and staying there, suggesting it may need to inflict much more pain than markets are currently discounting to achieve its goal,” the note said. :
The benchmark 10-year Treasury yield was flat on the day at 3.689%, after touching an overnight high of 3.772%. Japan’s 10-year yield rose 7 bps to 0.48%, close to the BOJ’s 0.5% ceiling.
Brent crude oil futures rose 0.2% to $80.13 per barrel.
Additional reporting by Naomi Rovnik in London and Tom Westbrook and Vidya Ranganathan in Singapore; Editing by Christian Schmollinger
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