Stocks, Bonds Drop as Yen Jumps on BOJ Yield Shift: Markets Wrap

(Bloomberg) – Stocks and bonds tumbled following the Bank of Japan’s unexpected adjustment to its yield curve control policy. The yen has recovered.

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A day that started with listless and slightly pessimistic trading in Asia was turned upside down when the BOJ raised the upper limit of its tolerance margin on 10-year Japanese government bonds to 0.5% from 0.25% .

European and US stock futures tumbled, while Asian equities fell, with the region’s key benchmark index heading for a fourth consecutive decline.

The Japanese currency, which had been appreciating since the end of October, jumped 3% against the dollar to reach its highest level since mid-August.

Japan’s 10-year yield, which had moved at a glacial pace in recent years under the weight of the BOJ’s YCC regime, jumped more than 20 basis points, the highest since 2015.

Similar-maturity yields in Australia rose by around the same amount while the 10-year Treasury yield jumped around 10 basis points for a second day.

“The Bank of Japan is once again teaching us that complacency is the devil,” Matthew Simpson, senior market analyst at City Index, wrote in a note. “This is arguably the biggest surprise they have given the markets since the move to negative interest rates in January 2016.”

According to Tatjana Greil Castro, co-head of public markets at Muzinich & Co, investors might be better off jumping into the Japanese bond market too quickly.

“If you come in too early and the 0.5% isn’t the end, you’d rather hang around, say, in the Treasury market where most people think most of the crunch is behind us than go in too soon in the Japanese market where there may be more tightening to come,” she said on Bloomberg Television.

A dollar gauge fell as the yen rallied. The yen also posted notable gains against currencies such as the euro and the Australian dollar.

The impact of the BOJ change will likely ripple through global markets for the rest of the year and into 2023. Japanese investors, who are among the biggest holders of Treasuries and major players in debt European Union, are now more incentivized to bring money home. Meanwhile, the stronger yen is making Japanese stocks more expensive for overseas buyers.

The movements during the Asian hours are set against a broader backdrop of lackluster global sentiment, which was highlighted by former New York Fed Chairman and Bloomberg Opinion columnist William Dudley. He told Bloomberg Television on Monday that optimistic markets could only tighten the Federal Reserve even further.

In commodities, oil stabilized, with West Texas Intermediate above $75 a barrel, and gold rose.

Key events this week:

  • Housing starts in the United States, Tuesday

  • EIA Crude Oil Inventory Report, Wednesday

  • US Existing Home Sales, US Conference Board Consumer Confidence, Wednesday

  • US GDP, initial jobless claims, US Conf. Council leading index, Thursday

  • US Consumer Income, New Home Sales, US Durable Goods, PCE Deflator, University of Michigan Consumer Sentiment, Friday

Some of the major moves in the markets as of 7:30 a.m. Tokyo time:

Shares

  • S&P 500 futures fell 0.6% at 7:04 a.m. in London. The S&P 500 closed down 0.9%

  • Nasdaq 100 futures fell 0.8%. The Nasdaq 100 closed down 1.4%

  • Euro Stoxx 50 futures fell 0.9%

  • Japan’s Topix fell 1.5%

  • Australia’s S&P/ASX 200 fell 1.5%

  • Hong Kong’s Hang Seng fell 1.6%

  • The Shanghai Composite fell 1.1%

Currencies

  • The Bloomberg Dollar Spot Index fell 0.4%

  • The euro fell 0.1% to $1.0596

  • The Japanese yen rose 2.7% to 133.23 per dollar

  • The offshore yuan was little changed at 6.9833 per dollar

  • The pound was little changed at $1.2143

Cryptocurrencies

  • Bitcoin rose 1.5% to $16,834.55

  • Ether rose 3.1% to $1,212.37

Obligations

  • The yield on 10-year Treasury bills rose seven basis points to 3.65%

  • The Japanese 10-year rate rose 16 basis points to 0.41%

  • The Australian 10-year yield rose 19 basis points to 3.73%

Goods

  • West Texas Intermediate crude rose 0.4% to $75.51 a barrel

  • Spot gold rose 0.4% to $1,794.10 an ounce

This story was produced with assistance from Bloomberg Automation.

–With help from Jason Scott.

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