Stocks rise, yen rises as BOJ battles bond bears

  • The BOJ is under intense pressure to defend its yield policy
  • Yen hits 7-month high, yuan rises as dollar weakens
  • More earnings ahead, many central bankers talk
  • Britain’s FTSE index hits record highs

SYDNEY/LONDON, Jan 16 (Reuters) – Stocks firmed on Monday on corporate earnings and optimism about China’s reopening as the Bank of Japan (BOJ) could ease its massive stimulus policy at a key meeting this week. US markets are designed for delicate trading.

The yen rose to its highest level since May after rumors that the BOJ may hold an emergency meeting on Monday as it struggles to maintain a new yield ceiling in the face of a massive sell-off. read more

That left local markets in a jittery mood, with Japan’s Nikkei (.N225) down 1.3% to a two-week low.

However, MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) added 0.27% and hopes of China’s rapid reopening led to a 4.2% gain last week.

And European stocks opened positive with the STOXX 600 (.STOXX) up 0.1% by 0850 GMT with healthcare stocks (.SXDP) up 0.6%.

Britain’s benchmark FTSE (.FTSE) index neared a 2018 record high of 7,903.50, with banks and life insurance companies among the biggest gainers.

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

World leaders, politicians and top corporate executives will attend the World Economic Forum in Davos, with a number of central bankers speaking, including at least nine members of the US Federal Reserve.

The BOJ’s two-day official meeting ends on Wednesday and speculation is rife that it will change its yield curve control (YCC) policy as the market pushes the 10-year yield above its new ceiling of 0.5%. read more

The BOJ bought almost 5 trillion yen ($39.12 billion) of bonds in its biggest daily transaction on record on Friday, but the 10-year yield was still up 0.51% on the session.

On Monday morning, the bank offered to buy another 1.3 trillion yen of JGBs, but the yield remained at 0.51%.

“There is still a possibility that market pressure will force the BOJ to further adjust or exit the YCC,” JPMorgan analysts said in a note. “We cannot ignore this possibility, but we do not consider it the main scenario at this stage.”

“Despite domestic demand starting to recover and inflation continuing to rise, the economy is not warming enough to bear the risk of a sharp rise in interest rates and a large appreciation of the yen,” they added.


While the BOJ’s dovish policy has weakened the yen, it has acted as a kind of anchor for yields globally. If it were to abandon policy, it would put upward pressure on yields in developed markets and likely see the yen appreciate.

The dollar was rocked by lower U.S. bond yields as investors argued the Federal Reserve may be less aggressive in raising rates with inflation clearly around 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 BOJ would make further changes to its yield control policy or abandon it entirely.

The yen rose about 0.5% to 127.215 per dollar, before easing to 128.6 by 0915 GMT.

The dollar index, which measures the US unit against a basket of major currencies, rebounded from a 7-month low touched at the beginning of the session and rose to 102.6.

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

The yield on the 10-year Treasury bond fell 3.498%, down 6 basis points last week, to near December levels and a key 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 has proven to be a disinflationary shock that increases the chances of a soft landing for the US economy.

“Lower inflation itself encourages a soft downturn through real wage growth by allowing the Fed to pause more easily and encouraging a better-behaved bond market with favorable effects on financial conditions,” Ruskin said.

“The soft landing also reduces the tail risk of higher US rates, and this reduced risk premium is helping global risk appetite,” Ruskin said.

Commodity prices, which rose last week, fell on Monday.

Falling earnings and the dollar benefited gold, which rose 2.9% last week, but the precious metal fell 0.4% to $1,911 an ounce in early trade on Monday.

Oil prices fell as a surge in COVID cases clouded the outlook for demand growth as China reopened 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 a barrel.

($1 = 127.8000 yen)

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

Our standards: Thomson Reuters Trust Principles.

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