Summary: The top story of the day was the unexpected decision from the Bank of Japan to raise its cap on the 10-year government bond yield to 0.50% from 0.25%. The Yen jumped versus all major currencies and strengthened by 3.7% to 131.80 versus the U.S. dollar. The U.S. 10-year Treasury yield surged 10bps to 3.68% while the S&P 500 managed to snap a four-day losing streak to finish slightly firmer. In extended-hour trading, Nike and FedEx gained on earnings beats. Chinese and Hong Kong stocks declined in a risk-off session.
S&P 500 pared the post-BOJ upward yield cap adjustment loss and managed to snap a four-day losing streak to finish 0.1% higher on Tuesday. Nasdaq 100 edged down by 0.1%. Energy, rising 1.5%, was the top gainer within the S&P500 as the WTI crude gained 1%. Consumer discretionary, dropping by 1.1%, was the biggest losing sector. On single stocks, Tesla (TSLA:xnas) was the biggest loser within both the S&P500 and Nasdaq 100. The electric vehicle maker tumbled 8% on Tuesday, following analyst downgrades. The stock shed 23.8% in December, significantly underperforming the 3.8% decline in Nasdaq 100 and the 3.4% loss in S&P 500. Nike (NKE:xnys) jumped nearly 12% in the extended-hour trading after the sportswear company reported revenue and earnings beats.
From the Intermediate through the long-maturity Treasuries sold off on the Bank of Japan’s decision to move its cap on 10-year Japanese government yields to 0.5% from 0.25%. Large blocks selling came in the five-year and 10-year futures contracts. The 10-year yield jumped 10bps to 3.68%, breaking the upper bound (in yield) of the trading range in December. Yields on the 2-year, anchored by the Fed’s rate path, finished the session unchanged. The 2-10-year yield curve steepened by 9bps to 58bps. The housing data released on Tuesday was mixed. Housing starts shrank by 0.5% M/M, less than the -1.8% expected but housing permits were down 11.2% M/M in November, much weaker than the -2.1% consensus in the Bloomberg survey.
Overnight U.S. stock market weaknesses, concerns about the spreading of Covid-19 in mainland China, and the upward adjustment the of yield cap by the Bank of Japan contributed to the risk-off sentiment in the Hong Kong and mainland Chinese stock markets. Hang Seng Index declined 1.3% and CSI300 Index plunged 1.7%. Technology stocks underperformed. Hang Seng TECH Index tumbled 3.1%, with Alibaba (09988:xhkg) and Tencent (00700:xhkg) dropping by around 3.4% each and Bilibili (09626:xhkg) tumbling 6.7%. Placement of shares at discount from two Hong Kong-listed Chinese developers, Agile (03383:xhkg) down 17.4%, and CIFI (00884:xhkg) down 16.5% weighed on the property sector. Country Garden (02007:xhkg) shed 8.8%.
The Bank of Japan surprised with a 25 basis point hike to the 10-year JGB cap, even as Governor Kuroda tried to ease the impact of the move on markets in his post-meeting press conference with statements suggesting that was “not a rate hike” and that it is too early to consider a general exit from or review of its Yield Curve Control (YCC) policy framework. USDJPY shed 3.7% to 131.80. The Japanese Yen soared more than 3% versus major currencies. Saxo’s Head of FX Strategy, John Hardy notes that the scale of the JPY reaction and its more than 12% rally off the lows against the US dollar, together with far lower commodity prices help ensure that we are very unlikely to see further policy tweaks under Governor Kuroda’s leadership. The ability of the JPY to continue higher after this step-wise reset will depend on the follow-up direction in global yields. FedEx (FDX:xnys) surged 4.3% in the extended hours on results beating earnings estimates.
WTI crude oil gained 1% to USD76.1 as the American Petroleum Institute (API) said crude oil inventories in the U.S. dropped by 3.1 million barrels last week.
Bank of Japan tweaked its long-held Yield Curve Control (YCC) policy in a surprise announcement after the December 19-20 meeting. The central bank widened the band in which it would allow rates for 10-year Japanese government bonds to move to -/+ 0.5% from -/+ 0.25% previously. The rest of the monetary policy levers were left unchanged, including the 10-year target still being held at 0%. In her notes, Charu Chanana suggests that the run higher in Japanese yields is likely to create further volatility in global equity and bond markets. As the market once again pressures the BOJ to move towards an eventual exit, the short JGB or long yen trades could potentially have more room to run. This is not just yen positive, but also negative for foreign assets. In terms of equities, this could mean a favourable stance towards Japanese financials vs. exporters and technology companies. For more details about the BOJ policy change, please refer to Charu’s notes.
Nike reported results from FY23 Q2, that ended on Nov 30, beating analyst estimates in sales and margins. Adjusted EPS came in at USD0.85, well above the US0.65 forecasted by analysts. Although inventories increased by 43% Y/Y, the management attributed the buildup to “abnormally low levels” resulting from supply chain disruption a year earlier. The company’s management gave an upbeat assessment of the holiday season sales momentum. FedEx reported FY23 Q2 Adjusted EPS at USD3.18, beating the USD2.8 expected. The positive surprise resulted from a combination of price increases and cost cuts despite a decline in package volume. The logistics giant guided an additional USD1 billion of projected cost cuts in fiscal 2023.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?
The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
