- BOJ under intense pressure as it defends yield policy
- Yen hits 7-month high, yuan rises as dollar weakens
- More earnings to come, many central bank spokespeople
- Britain’s FTSE flirts with a record high
SYDNEY/LONDON, Jan 16 (Reuters) – Shares firmed on Monday as optimism over corporate earnings and the reopening of China offset concerns that the Bank of Japan (BOJ) may ease its super-loose stimulus policy at a key meeting this week until the holiday in the US markets are set for weak trading.
The yen climbed to its highest since May after rumors spread that the Bank of Japan may hold an emergency meeting on Monday as it struggles to defend its new yield ceiling in the face of massive selling. Read more
That sparked a jittery mood in local markets, with Japan’s Nikkei (.N225) falling 1.3% to a two-week low.
Still, MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) added 0.27 percent, with hopes of a quick reopening in China giving it a 4.2 percent gain last week.
And European shares opened positively with the STOXX 600 (.STOXX) up 0.1% by 0850 GMT, led by healthcare stocks (.SXDP) which gained 0.6%.
Britain’s benchmark FTSE index (.FTSE) edged closer to the record high of 7,903.50 it hit in 2018, with banks and life insurers among the top gainers.
Earnings season is gathering pace this week with Goldman Sachs ( GS.N ), Morgan Stanley ( MS.N ) and Netflix ( NFLX.O ) among the reports.
World leaders, politicians and top corporate executives will attend the World Economic Forum in Davos and a host of central bankers will speak, 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 pushed 10-year yields above their new ceiling of 0. 5%. Read more
Japan’s central bank bought almost 5 trillion yen ($39.12 billion) of bonds on Friday in its biggest daily operation on record, but the 10-year bond yield still ended the session up 0.51 percent.
Early on Monday, the bank offered to buy another 1.3 trillion yen of JGBs, but the yield remained at 0.51%.
“There is still some possibility that market pressures could force the BOJ to adjust further 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.
“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.
THE YEN IS NOT ANCHORED
The BOJ’s ultra-easy policy is acting as something of an anchor for global yields while dragging down the yen. If it abandons policy, it will put pressure on yields in developed markets and most likely lead to a surge in the yen.
The dollar was undermined by falling U.S. bond yields as investors bet the Federal Reserve may be less aggressive in raising interest rates given that inflation has apparently 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 Bank of Japan will make further adjustments or abandon its yield control policy altogether.
The yen jumped roughly 0.5 percent to a high of 127.215 per dollar before easing to 128.6 by 09:15 GMT.
The dollar index, which measures the greenback against a basket of major currencies, rebounded from a 7-month low touched earlier in the session to 102.6.
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% probability.
The 10-year Treasury yield eased to 3.498% after falling 6 basis points last week, near the December bottom and the chart’s main target of 3.402%.
Alan Ruskin, global head of G10 FX Strategy at Deutsche Securities, said the easing of global supply constraints in recent months is proving to be a disinflationary shock that increases the chance of a soft landing for the US economy.
“Lower inflation itself encourages a soft landing through real wage gains, allowing the Fed to pause more easily and encouraging better bond market behavior, with beneficial effects on financial conditions,” Ruskin said.
“The soft landing also reduces the risk of much higher US interest rates, and this reduced risk premium helps global risk appetite,” Ruskin added.
Commodity prices, which rose last week, fell on Monday.
Falling yields and the dollar weighed on gold, which jumped 2.9 percent last week, but the precious metal fell 0.4 percent to $1,911 an ounce in early trade on Monday.
Oil prices fell as a surge in COVID cases clouded prospects for a surge 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 U.S. West Texas Intermediate crude CLc1 was down 61 cents, or 0.6%, at $79.24 per barrel.
($1 = ¥127.8000)
Reporting by Wayne Cole and Lawrence White; Editing by Shri Navaratnam and Emelia Sithole-Matarise
Our standards: The Thomson Reuters Trust Principles.
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