Stocks shined, the dollar slumped as the Bank of Japan grappled with lower bond prices

LONDON (Reuters) – Stocks extended their rally into the new year on Monday amid optimism about the global economy, inflation under control and reopening China on concerns that the Bank of Japan may ease its massive stimulus policy at a pivot point. meeting this week.

The yen climbed to its highest levels since May after rumors spread that the Bank of Japan may hold an emergency meeting on Monday as it struggles to defend its new yield ceiling in the face of aggressive selling, sending the dollar to a seven-month low.

However, beyond those fears that the Bank of Japan will be forced to abandon its decades-old attempt to stoke higher prices in the world’s third-largest economy, investor confidence remained amid tentative signs that the recession in Europe may be milder than feared.

District STOXX 600 (.STOXX) The main index was up 0.3% by 1145 GMT, propelled by healthcare stocks (.SXDP) which rose by 0.6%, Britain’s FTSE rose at 7,856 to a record high of 7,903.

MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) It rose 0.37%, with hopes for a quick reopening of China giving it a 4.2% gain last week.

The fragile rally in stocks that marked the first weeks of the year could be tested from several angles this week, as world leaders, policymakers and corporate CEOs gather at the World Economic Forum (WEF) in Davos.

The World Economic Forum said on Monday that two-thirds of the leading public and private economists surveyed expect a global recession in 2023, signaling tough times await markets.

A group of central bankers is also scheduled to speak this week, including nine members of the US Federal Reserve.

The BoJ’s two-day official meeting ends on Wednesday and speculation is rife that it will make changes to its Yield Curve Control (YCC) policy given the market pushed 10-year yields above their new 0.5% ceiling. Read more

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

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

“There is still some possibility that market pressure will force the Bank of Japan 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 major scenario.”

Yen not installed

The Bank of Japan’s Uber-easy policy acted as a sort of anchor for yields globally, while dragging the yen lower. If this policy is abandoned, this will put upward pressure on yields across developed markets and will most likely see the yen strengthen.

The dollar has been undermined by lower US bond yields as investors bet that the Federal Reserve could be less aggressive in raising interest rates, given that inflation has clearly turned the corner.

The Japanese yen rose to a seven-month high against the dollar on Monday, as market sentiment was dominated by expectations that the Bank of Japan will abandon its yield control policy or make further adjustments to it.

The yen jumped about 0.5 percent to 127.215 per dollar, before easing to 128.3 by 1156 GMT.

The dollar index, which measures US unity against a basket of major currencies, recovered from a 7-month low earlier in the session to 102.3.

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

The 10-year Treasury yield fell 3.498%, after falling 6 basis points last week, near its December low and a key chart target of 3.402%.

The easing of global supply bottlenecks in recent months has been a shock to inflation, which increases the chance of a soft landing for the US economy, said Alan Ruskin, global head of G10 foreign exchange strategy at Deutsche Securities.

“A lower inflation rate itself encourages a soft landing through real wage gains, by allowing the Federal Reserve to stall more easily and by encouraging a better-behaved bond market, with favorable spillovers for financial conditions,” Ruskin said.

US stock markets were closed on Monday for Martin Luther King Jr. Day, a national holiday.

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

The decline in revenues and the dollar benefited from the price of gold, which jumped 2.9 percent last week, but the precious metal fell 0.2 percent to $ 1916 an ounce on Monday.

Oil prices fell but held near the highest levels of the year as rising COVID cases clouded the prospects of increased demand as China reopens its economy.

Brent crude fell 25 cents, or 0.29 percent, to $85.03 a barrel by 1210 GMT, while US West Texas Intermediate crude fell 14 cents, or 0.18 percent, to $79.72 a barrel.

($1 = 127.8000 yen)

Reporting on Lawrence White and Wayne Cole; Editing by Emilia Sithole-Matarris and Bernadette Boehm

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