Festive cheer dampened by signals of interest rates rising further

Singapore — Asia’s stock markets made a wobbly start to the final full trading week of 2022, with the prospect of interest rates rising further next year taking the edge off festive cheer.

The US Federal Reserve (Fed) and European Central Bank (ECB) hiked rates and promised more last week, and speculation is even building that the Bank of Japan (BoJ), which meets on Monday and Tuesday, is eyeing a shift in its ultradovish stance.

Japan’s Nikkei fell 1.1% and the yen, which rose about 0.4% to 136.20/$, was the biggest mover in otherwise quiet currency trade. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.4%.

Japan will consider revising a 2% inflation target agreed upon between the government and central bank in 2023, four sources familiar with the matter told Reuters. News agency Kyodo first reported the potential change. When asked about Kyodo’s report, chief cabinet secretary Hirokazu Matsuno said there is no truth in the government being set to revise its inflation agreement.

“Where there’s smoke, eventually there is fire,” said National Australia Bank strategist Rodrigo Catril in Sydney.

“This sort of news we’re getting plays to this view that the government will open the door for the BoJ to have a more flexible approach,” he said, “and that some of this uber-undervaluation of the yen can be reversed.”

The yen has been the worst-performing Group of 10 currency this year, with a 15% loss against the dollar, driven mainly by the gap between rising US rates and anchored Japanese rates.

Five-year Japanese government bond yields hit a nearly eight-year high.

US rates were steady last week, despite the Fed projecting further hikes ahead, as traders fret that interest rates are already high enough to start hurting economic growth. Ten-year Treasury yields sat at 3.5204%.

The S&P 500 dropped 2% last week. It is down 20% for the year and has failed in several attempts at sustainably trading above its 200-day moving average.

S&P 500 futures rose 0.1%. European futures rose 0.2%. In Europe, equities and the bond market were caught off guard by an unexpectedly hawkish tone from the ECB.

Softening economic data heading into the year end is not offering much help to the mood either, leaving markets wondering where to look for the feel-good vibe that has helped US stocks rally in the last two weeks of December 11 times in the past 15 years.

“The Santa rally normally kicks in around mid-December on the back of festive cheer and new year optimism, the investment of any bonuses, low volumes and no capital raisings at this time of year,” said AMP Capital strategist Shane Oliver.

“It has tended to be weaker or less reliable in years when the market is down year to date, though,” he added.

European, Japanese and US business activity shrank in December, surveys showed last week, keeping a bid for the safe-haven dollar and pausing gains for the euro.

The euro hit a six-month high of $1.0737 last week, though it last bought $1.0600.

Business confidence in China has also hit its lowest since the World Economics Survey began collecting data in January 2013 and China’s stock markets have struggled to extend a rally unleashed by easing Covid-19 controls.

The Hang Seng fell 0.5%.

Hopes for improvements in demand stabilised oil prices on Monday, with Brent crude futures up 0.8% at $79.70 a barrel, but it has barely gained for the year.

Gold was steady at $1,793/oz. Bitcoin remained trading below $17,000.

Reuters