Stocks Rise, Yen Climbs as BOJ Battles Bond Bears

  • BOJ under heavy pressure as it defends yield policy
  • Yen hits 7-month high, yuan climbs as dollar eases
  • More profits to come, many central bank speakers
  • Britain’s FTSE flirts with records

SYDNEY/LONDON, Jan 16 (Reuters) – Stocks firmed on Monday as optimism over corporate earnings and the reopening of China feared the Bank of Japan (BOJ) would temper its sweeping stimulus policy at a pivotal meeting this week, while a holiday in US markets are made for thin trading.

The yen hit its highest level since May after rumors swirled that the BOJ could hold an emergency meeting on Monday as it struggles to defend its new yield cap against a sell-off. Read more

This put local markets in an anxious mood, and the Japanese Nikkei (.N225) slipped 1.3% to a two-week low.

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

And European stocks opened positively with the STOXX 600 (.STOXX) up 0.1% at 0850 GMT driven by healthcare stocks (.SXDP) which gained 0.6%.

Britain’s benchmark FTSE (.FTSE) edged close to the record high of 7903.50 it set in 2018, with banks and life insurers among the main gainers.

Earnings season is gathering pace this week with Goldman Sachs (GS.N), Morgan Stanley (MS.N) and Netflix (NFLX.O) among those to report.

World leaders, policy makers and top business leaders will attend the World Economic Forum in Davos, and many 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 as the market pushed yields higher. 10 years above its new cap of 0.5%. Read more

The BOJ bought nearly 5 trillion yen ($39.12 billion) in bonds on Friday in its biggest daily deal on record, but 10-year yields still ended the session higher at 0, 51%.

Early on Monday, the bank offered to buy an additional 1.3 trillion yen from JGB, but the yield remained at 0.51%.

“It is still possible that market pressure will force the BOJ to adjust further or exit the YCC,” JPMorgan analysts said in a note. “We can’t discount that possibility, but at this point we don’t see it as a primary storyline.”

“Although domestic demand has started to recover and inflation continues to rise, the economy is not warming to the point where it can tolerate a sharp rise in interest rates and the potential risk of significant appreciation of the yen,” they added.

THE UNPEEDED YEN

The BOJ’s ultra-easy policy acted as something of an anchor for yields globally, while pushing the yen lower. If he were to abandon this policy, it would put upward pressure on developed market yields and most likely see the yen soar.

The dollar was undermined by falling US bond yields as investors bet the Federal Reserve may be less aggressive in raising rates as inflation has clearly turned the corner.

The Japanese yen hit a more than seven-month high against the dollar on Monday as market sentiment was dominated by expectations that the BOJ would make further changes or abandon its yield-control policy altogether.

The yen jumped around 0.5% to hit a high of 127.215 to the dollar, before falling back to 128.6 at 0915 GMT.

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

Futures now imply almost no chance of the Fed raising rates by half a point in February, with a quarter-point move seen as a 94% probability.

Yields on 10-year Treasuries are down to 3.498%, after falling 6 basis points last week, near their December lows 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 over the past few months has proven to be a disinflationary shock, raising the odds of a a soft landing for the US economy.

“The fall in inflation itself encourages a soft landing through real wage gains, allowing the Fed to pause more easily and encouraging a wiser bond market, with favorable spillover effects on financial conditions. “, said Ruskin.

“A soft landing also reduces the tail risk of much higher US rates, and this reduction in risk premia contributes to global risk appetite,” Ruskin added.

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

Lower yields and the dollar had benefited the price of gold, which jumped 2.9% last week, but the precious metal slipped 0.4% to $1,911 an ounce in early trading. Monday.

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

Brent crude fell 73 cents, or 0.83%, to $84.57 a barrel at 0857 GMT, while U.S. West Texas Intermediate CLc1 crude fell 61 cents, or 0.6%, to 79, $24 a barrel.

($1 = 127.8000 yen)

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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