Bonds and equities wince as Japan signals end to negative rates

London — Japan’s long-suppressed yen surged and global bond and stock markets flinched on Thursday after Tokyo’s monetary policymakers gave their clearest hints yet that the exit from ultra-low interest rates was approaching.

The yen strengthened 1.5% against the dollar, its biggest one-day jump since January, and looked set to extend its post-Covid record of finishing the year strongly.

The Nikkei’s sharpest drop since late October had ensured Asian stocks finished lower while the FTSE 100, Dax, CAC 40 and S&P 500 futures were all around 0.3% weaker in early European trading.

Bank of Japan (BOJ) Governor Kazuo Ueda had added to speculation about a shift away from negative rates by saying policy management would “become even more challenging from the year-end and heading into next year” and flagged several options of what could follow.

Money markets started pricing in a near 40% chance that the BOJ will change its course at its final meeting of the year on December 19. Japanese government bonds also saw a sharp sell-off, with yields on 10-year debt jumping 11.5 basis points (bps).

Societe Generale strategist Kit Juckes said year-end rallies by the yen had become something of a habit since the pandemic, though this move appeared different and the firm sees it as precursor for a strong move upwards next year.

“The yen is cheap as chips and it sounds like they [Japanese policymakers] have moved beyond the fact they are going to have to get rid of negative rates,” he said.

“We have call of 130 [yen to the dollar] for the end of next year ... as long as you think there is a bull market in US treasuries you are supposed to think there is a bull market in the yen too.”

The rally in bond markets and fall in global borrowing costs in recent weeks has seen world stocks rise 10% and volatility, as measured by the VIX index, drop to its lowest since before the Covid pandemic.

Thursday’s action put a temporary stop to that however. Traders are turning their focus to the weekly US jobless claims data later in the day, ahead of the non-farms payroll report due on Friday. Economists expect the US added 180,000 new jobs in November, up from 150,000 the previous month.

Data on Wednesday showed a smaller-than-expected rise in private US payrolls in the latest sign that the American labour market is gradually cooling.

The yen’s big move knocked the dollar index down 0.3% to under 104. Markets have priced in so many Federal Reserve rate cuts recently that traders feel vulnerable to an upside surprise in US data.

China concerns

The yield on the benchmark US 10-year treasury note bounced off a three-month low to 4.1515%, though Germany’s 10-year bond yield, the benchmark for the eurozone, barely budged at 2.205% just above a seven-month low.

Sentiment on China was still bearish after Moody’s issued a downgrade warning on China's credit rating and cut the outlook for Hong Kong, Macau and Chinese local government financing vehicles.

Mixed trade data out of China also failed to provide much impetus. November exports rose for the first time in six months while imports unexpectedly shrank, suggesting domestic demand remained weak.

China’s blue-chips index ended 0.2% lower after hitting a five-year trough earlier in the session. Hong Kong’s Hang Seng fell to a 13-month low.

Gold prices ticked higher to $2,033 an ounce.

Reuters