Stocks rise, yen climbs as BOJ battles bond bears

SYDNEY/LONDON, Jan 16 (Reuters) – Stocks rallied on Monday as optimism over corporate earnings and China’s reopening offset concerns the Bank of Japan (BOJ) may moderate its overall stimulus policy at a key meeting this week, while a holiday in U.S. markets made for thin trade.

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

That had local markets in an anxious mood, 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 ) rose 0.27%, with hopes of a quick Chinese reopening giving it a 4.2% gain last week.

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

Britain’s benchmark FTSE (.FTSE) index came close to the record high of 7,903.50 it hit in 2018, with banks and life insurers among the biggest winners.

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

World leaders, policy makers and top business executives will attend the World Economic Forum in Davos, and there are a number of central bankers speaking, including no less than nine members of the US Federal Reserve.

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

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

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

“There remains some 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.”

“Although domestic demand has started to pick up and inflation continues to rise, the economy is not heating up to the extent that a sharp interest rate hike and potential risk of large yen appreciation can be tolerated,” they added.

THE YEN UNCREDITED

The BOJ’s uber-easy policy has acted as an anchor of sorts for yields globally, while also dragging down the yen. If it were to abandon policy, it would put upward pressure on yields across developed markets and most likely see the yen rise.

The dollar has been undermined by falling US bond yields as investors bet the Federal Reserve may be less aggressive in raising interest rates given that inflation has clearly 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 BOJ would make further adjustments to, or completely abandon, its yield controls.

The yen jumped about 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 102.6.

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

The 10-year Treasury yield is down at 3.498%, after falling 6 basis points last week, near December lows, and the main 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 proved to be a disinflationary shock, increasing the chance of a soft landing for the US economy.

“The lower inflation itself encourages a soft landing through real wage gains, allowing the Fed to stop more easily and encouraging a better-behaved bond market, with beneficial spillovers to financial conditions,” Ruskin said.

“A soft landing also reduces tail risk for much higher US rates, and this reduced risk premium helps global risk appetite,” Ruskin added.

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

The fall in yields and the dollar had benefited gold prices, which jumped 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 overshadowed the prospect of a pick-up 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 US 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; Editing by Shri Navaratnam and Emelia Sithole-Matarise

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