Stocks, bonds drop as yen jumps on BOJ yield shift: markets wrap

Stocks and bonds slumped in the wake of the Bank of Japan’s unexpected adjustment to its yield-curve control policy. The yen rallied.

A day that began with listless, mildly downbeat trading in Asia was thrown into turmoil when the BOJ increased the upper limit of its tolerance band on 10-year Japanese government bonds to 0.5% from 0.25%.

European and US equity futures slumped, while stocks in Asia tumbled, with the region’s key benchmark headed for a fourth straight drop.

The Japanese currency, which had been appreciating since late October, surged 3% versus the dollar to the strongest 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, surged more than 20 basis points, to the highest since 2015.

Similar-maturity yields in Australia were up by around the same amount while the 10-year Treasury yield leaped about 10 basis points for a second day.

“The Bank of Japan once again teach 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 handed markets since moving to negative interest rates in January 2016.”

Investors might be better holding back from jumping into the Japanese bond market too quickly, according to Tatjana Greil Castro, co-head of public markets at Muzinich & Co.

“If you come in too early and the 0.5% is not the end, you’d rather hang out, let’s say, in the Treasury market where most people think most of the tightening is behind us than coming in too early into the Japanese market where maybe there’s more tightening to come,” she said on Bloomberg Television.

A gauge of the dollar dropped as the yen rallied. The yen also showed notable gains against currencies including the euro and the Australian dollar.

The impact of the BOJ’s shift will likely ripple through global markets for the remainder of the year and into 2023. Japanese investors, who are among the biggest holders of Treasuries and major players in European debt, now have more incentive to bring money home. Meanwhile, the stronger yen makes Japanese stocks more expensive for overseas buyers.

The moves during Asian hours come in the broader context of poor global sentiment, which was highlighted by former New York Fed President and Bloomberg Opinion columnist William Dudley. He told Bloomberg Television on Monday that optimistic markets could only make the Federal Reserve tighten even more.

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

Key events this week:

• US housing starts, Tuesday
• EIA Crude Oil Inventory Report, Wednesday
• US existing home sales, US Conference Board consumer confidence, Wednesday
• US GDP, initial jobless claims, US Conf. Board leading index, Thursday
• US consumer income, new home sales, US durable goods, PCE deflator, University of Michigan consumer sentiment, Friday

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

Stocks

• S&P 500 futures fell 0.6% as of 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 British pound was little changed at $1.2143

Cryptocurrencies

• Bitcoin rose 1.5% to $16 834.55
• Ether rose 3.1% to $1,212.37

Bonds

• The yield on 10-year Treasuries advanced seven basis points to 3.65%
• Japan’s 10-year yield advanced 16 basis points to 0.41%
• Australia’s 10-year yield advanced 19 basis points to 3.73%

Commodities

• West Texas Intermediate crude rose 0.4% to $75.51 a barrel
• Spot gold rose 0.4% to $1,794.10 an ounce