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European markets pare losses after Bank of Japan surprise

European markets initially opened sharply lower in the wake of the Bank of Japan’s decision to relax its yield curve control criteria, however over the course of the day we’ve pulled off the lows of the day, with the FTSE100 outperforming and pushing into the green in the afternoon session.

Europe

Bond yields have still spiked higher as investors look to price in further tightening next year, however the initial knee jerk reaction has been tempered by the fact that this was likely to happen in the New Year anyway, and it’s the timing that has surprised.

Nonetheless the die has been cast, setting into a motion of train of events that makes the Bank of Japan much less of a global outlier, and points to the prospect of further tightening in rates heading into 2023, with the higher yields helping to lift banking stocks like HSBC, Lloyds, and NatWest

Firmer commodity prices are helping to lift basic resource stocks, led by Glencore and Antofagasta. Banks are also slightly firmer on the back of higher yields.   

Housebuilders have seen little to no reaction to reports the UK government has extended its mortgage guarantee program by one year. The program offers financial guarantees to lenders so they can provide 95% mortgages on properties worth £600k. 

British Airways owner IAG shares have slipped back after an IT glitch prompted the cancellation of hundreds of long-haul flights due to a problem with its flight planning systems.       

US

US markets opened mixed with the Dow opening higher but the S&P500 and Nasdaq 100 opening lower, after a poor set of housing starts and building permits numbers for November.

Netflix shares have slipped back as recent research data showed that the new ad tier was proving to be less popular than expected. Following on from reports that the streaming company was having to refund some advertisers due to lower-than-expected views. This would suggest that Netflix’s problem isn’t so much pricing but the content itself if a lower price can’t generate higher subscriber numbers.

Disney shares are also in focus after falling to two and a half year lows yesterday after the new Avatar movie fell short on revenue on its opening weekend. This seems a little bit of an overreaction, however it does speak to increasing nervousness about the outlook for revenue generation in all its businesses, whether it be streaming, theme parks or entertainment, in a rising interest rate environment.

After the bell we have the latest earnings report from Nike with the focus on sales in Greater China seeing a fall of 16% to $1.7bn in Q1, even as sales in the US increased. For Q2 Nike said it expects to grow revenue by low double digits on the basis of a pickup in consumer demand.

FedEx is also due to report its latest quarterly numbers saying it expects Q2 revenues to come in 4% lower at $23.75bn. Profits for Q1 also came in below expectations of $5.14c a share, at $3.44c. The company said it would be taking further measures to cut costs and raise prices as it looked to make $2.7bn in savings. The plans are said to include cutting flights as well as closing underperforming offices. Q2 profits are expected to come in at $2.80c a share.

Wells Fargo has shrugged off this today’s news that the bank has agreed a $3.7bn settlement with the Consumer Financial Protection Bureau in respect of abuses over the sale of auto loans and mortgages. 

FX

The US dollar has spent a rare day out of the limelight, with all eyes on the Japanese yen which has surged after the Bank of Japan unexpectedly widened the band for its yield curve control policy by 25bps to -0.5%/0.5%. There had been speculation in recent weeks that such a move might be coming, however most expected this to happen early next year, and not in the twilight period leading up to Christmas when liquidity is low.

Today’s move has been outsized with Bank of Japan governor Kuroda citing concerns over market functionality, while also saying we are not seeing an indicator of a tightening of monetary policy. That’s a tough message to sell given the unexpected nature of the move and suggests that the Bank of Japan is concerned about policy lags in the same way as the Fed, especially when CPI is already at 8-year highs of 3.7%.

The Australian dollar has underperformed after the latest RBA minutes showed that the central bank considered holding rates at its December policy meeting. The RBA was one of the first central banks to slow its rate hiking cycle a couple of months ago, amidst concern over the housing market. It now appears that these concerns are becoming much more prevalent hence the recent caution..

In further signs that inflation pressures are easing in Germany and the wider euro area, the latest German PPI numbers for November saw prices decline by -3.9%, pulling the year-on-year rate down to 28.2%. This decline further undermines the ECB narrative that the bloc hasn’t hit peak inflation.

Commodities

Crude oil prices have continued to look relatively underpinned as the US looks to replenish its SPR, however uncertainty over the demand outlook as China continues to battle rising infection rates is helping to cap the upside.   

Despite a sharp rise in yields, gold prices have moved back above $1,800 on the back of a weaker US dollar.

Volatility

Tesla’s share price swung in a range exceeding 5% during Monday’s session with hopes that Elon Musk may spend more time focused on the automaker – and less on Twitter – seemingly driving sentiment. This story arguably has some way to roll, but with Tesla’s valuation down 62% from the start of the year, a degree of investor frustration is understandable. One day vol came in at 124.94% against 91.77% on the month.

Raw Sugar prices have been active in recent trading, retreating from tests of multi-year highs late last week. The move in sentiment here however seems to have been driven by a degree of profit taking alongside some modest mitigation in supply constraints, but with many of the fundamental drivers including high fuel costs remaining intact, further action could be seen. One day vol on the raw sugar contract printed 39.72% versus 33.99% for the month.

Fiat currencies were relatively calm at the start of the week, with EUR/JPY being a rare outlier where daily volatility of 10.78% came in just ahead of the one month reading at 10.68%. However, the Yen is likely to find itself as the source of further attention as the week progresses in the wake of the hugely well received policy tweak deployed by the Bank of Japan in the last few hours. This saw the EUR/JPY cross lose more than four Yen in a matter of minutes.

US Banking stocks also proved to have something of a mixed start to the week. There’s concern over the impact recession would have on the sector, although opinions remain divided on the likelihood and depth of this, and there’s also the idea that the market may have already overcompensated in some instances. One day volatility on CMC’s proprietary basket of US banking stocks came in at 36.43%, slightly up on the 36.06% figure for the month.

 


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