Yen Jumps as Stocks, Bonds Drop on BOJ Yield Shift: Markets Wrap

(Bloomberg) — The yen rallied while stocks and bonds slumped in the wake of the Bank of Japan’s unexpected adjustment to its yield-curve control policy.

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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 government bonds to 0.5% from 0.25%.

The Japanese currency, which had been appreciating since late October, surged almost 3% versus the dollar to the strongest level since mid-August. US and European equity futures slumped and Asian stocks extended declines, with a gauge of regional shares headed for a fourth straight drop.

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 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.”

The yield-curve control change may reflect Japan’s preference for a stronger yen, according to National Australia Bank Ltd. “A wider YCC band favors a stronger yen as long as 10-year Treasuries don’t sell by more than Japanese government bonds,” said Rodrigo Catril, the bank’s Sydney-based strategist.

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

Equities were already on the back foot given broader investor concern on the global inflation outlook.

Underscoring the poor global sentiment, former New York Fed President and Bloomberg Opinion columnist William Dudley told Bloomberg Television on Monday that optimistic markets could only make the central bank tighten even more.

In commodities, iron ore was among the key industrial materials to climb after a pledge of growth support from Beijing authorities. 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 am Tokyo time:

Inventory

  • S&P 500 futures fell 1% as of 2:46 pm in Tokyo. The S&P 500 closed down 0.9%

  • Nasdaq 100 futures fell 1.2%. The Nasdaq 100 closed down 1.4%

  • Japan’s Topix fell 1.7%

  • Australia’s S&P/ASX 200 fell 1.5%

  • Hong Kong’s Hang Seng fell 2.1%

  • The Shanghai Composite fell 1.3%

  • Euro Stoxx 50 futures fell 1.6%

Currencies

  • The Bloomberg Dollar Spot Index fell 0.2%

  • The euro fell 0.2% to $1.0585

  • The Japanese yen rose 2.8% to 133.14 per dollar

  • The offshore yuan was little changed at 6.9904 per dollar

Cryptocurrencies

  • Bitcoin pink 1.1% to $16,771.23

  • Pink Ether 2.6% to $1,206.4

Leaps

  • The yield on 10-year Treasuries advanced eight basis points to 3.67%

  • Japan’s 10-year yield advanced 15 basis points to 0.41%

  • Australia’s 10-year yield advanced 19 basis points to 3.73%

Commodities

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Jason Scott, Toru Fujioka, Sumio Ito and Ruth Carson.

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