Stocks rise, yen rises as BOJ fights bond bears

  • BOJ under intense pressure as it defends yield policy
  • Yen Hits 7-Month High, Yuan Rises as Dollar Eases
  • More revenue ahead, many central bank speakers
  • British FTSE flirts with record high

SYDNEY/LONDON, Jan. 16 (Reuters) – Stocks confirmed on Monday as corporate earnings optimism and China’s reopening mean the Bank of Japan (BOJ) could temper its massive stimulus at a pivotal meeting this week as a holiday in U.S. markets made for thin trading.

The yen climbed to its highest level since May after rumors circulated that the BOJ could hold an emergency meeting on Monday as it struggles to defend its new yield cap in the face of massive selling. read more

That sent local markets into a frightened mood and Japan’s Nikkei (.N225) fell 1.3% to a two-week low.

Still, MSCI’s broadest index of Asia-Pacific stocks outside of Japan (.MIAPJ0000PUS) gained 0.27% on hopes for a quick reopening in China, giving it a 4.2% gain last week.

And European stocks opened on a positive note with the STOXX 600 (.STOXX) rising 0.1% by 0850 GMT, driven by health stocks (.SXDP) gaining 0.6%.

The UK benchmark FTSE index (.FTSE) came close to the all-time high of 7903.50 it reached in 2018, with banks and life insurance companies leading the way.

Earnings season kicks off this week with Goldman Sachs (GS.N), Morgan Stanley (MS.N) and Netflix (NFLX.O) among others.

World leaders, policy makers and leading business leaders will be present at the World Economic Forum in Davos, and a host of central bankers will be speaking, including nine members of the US Federal Reserve.

The BOJ’s official two-day meeting ends Wednesday and speculation is rampant that it will make changes to its yield curve control (YCC) policy as the market has pushed 10-year rates above its new 0.5% ceiling. read more

The BOJ bought nearly 5 trillion yen ($39.12 billion) worth of bonds on Friday in its largest ever daily operation, but the 10-year yield still ended the session at 0.51%.

Early Monday, the bank offered to buy another 1.3 trillion yen JGBs, but the yield stalled at 0.51%.

“There is still a possibility that market pressures will force the BOJ to further adjust 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 main scenario.”

“While domestic demand is starting to recover and inflation continues to rise, the economy is not warming to the point where a sharp rise in interest rates and the potential risk of a sharp appreciation of the yen can be tolerated,” they added.

THE YEN UNKNOWN

The BOJ’s ultra-easy policy has acted as an anchor of sorts for global returns as it dragged the yen downwards. Letting go of the policy would put upward pressure on yields in developed markets and most likely push the yen higher.

The dollar has been undermined by falling US bond yields as investors bet that the Federal Reserve can be less aggressive in raising rates as inflation has clearly reversed.

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 further adjust its yield-control policies or abandon it entirely.

The yen rose roughly 0.5% to a high of 127.215 per dollar before falling to 128.6 by 0915 GMT.

The dollar index, which measures the US unit against a basket of major currencies, recovered from a 7-month low touched earlier in the session to reach 102.6.

Futures now imply almost no chance that the Fed will raise rates by half a point in February, with a 94% chance of a quarter-point move.

Yields on 10-year government bonds have fallen to 3.498%, after falling 6 basis points last week, close to the December low, and an important chart target of 3.402%.

Alan Ruskin, global head of G10 FX Strategy at Deutsche Securities, said the easing of global supply bottlenecks in recent months appeared to be a disinflationary shock, raising the likelihood of a soft landing for the US economy.

“Lower inflation itself is driving a soft landing through real wage increases by allowing the Fed to pause more easily and encouraging a better-behaved bond market, with favorable spillovers to financial conditions,” Ruskin said.

“A soft landing also reduces tail risk from much higher US interest rates, and these lowered risk premiums help global risk appetite,” Ruskin added.

Commodity prices, which had risen last week, fell on Monday.

The fall in yields and the dollar helped gold prices, which rose 2.9% last week, but the precious metal fell 0.4% in early trading Monday to $1,911 an ounce.

Oil prices fell as a rise in COVID cases clouded prospects for a surge in demand as China reopens its economy.

Brent crude fell 73 cents, or 0.83%, to $84.57 a barrel at 0857 GMT, while US West Texas Intermediate crude CLc1 fell 61 cents, or 0.6%, to $79.24 a barrel.

($1 = 127,800 yen)

Reporting by Wayne Cole and Lawrence White; Edited by Shri Navaratnam and Emelia Sithole-Matarise

Our Standards: The Thomson Reuters Principles of Trust.

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