Daily Market Comment – Yen rolls over as BoJ refuses to join party, stocks pummeled



  • Bank of Japan delivers no policy changes, hammers yen back down 
  • Stock market selloff intensifies, dollar hit by lower yields, gold shines
  • Mixed signals from Bank of England send sterling on a rollercoaster ride
BoJ holds the line

The Bank of Japan stuck to its guns today, keeping its policy settings unchanged and doubling down on its commitment to maintain yield curve control - the strategy responsible for the carnage in the Japanese yen. Speculation was running wild that the BoJ might follow the SNB and take the first step towards normalization, which sparked a relief rally in the yen, until the BoJ poured cold water on those expectations and the gains evaporated. 

By keeping their foot on the gas, BoJ officials hope to import enough inflation from abroad to break the deflationary mindset that’s been embedded in Japanese society for decades now, and kickstart the stalled economy. The yen has been suffering collateral damage from this process.

Of course, everything has limits. The yen’s collapse has turned into a political issue and with inflation having breached its 2% target, there’s tremendous pressure on the BoJ to change course. Governor Kuroda probably has a few more months to attempt his inflation experiment, which implies some more stress for the yen, but the downtrend seems to be entering its final phase. 

Stocks dive, dollar shrugs

The retreat in stock markets has turned into a rout, with Wall Street taking another punch to the gut yesterday as the global offensive to raise interest rates has stoked concerns around a hard economic landing, sending market participants scrambling to slash risk exposure. The S&P 500 fell more than 3% and is headed for heavy weekly losses, in anticipation of downgrades in earnings estimates as higher rates and spending cuts ripple through the economy. 

Recessionary signs are everywhere with businesses announcing layoffs, the housing market showing cracks, and consumers struggling to make ends meet. However, it is useful to remember that recession doesn’t always mean Armageddon. There have been several of them since the end of World War II and most were ‘plain vanilla’ - brief and shallow. Historically speaking, the Fed also tends to reverse course as soon as the engines start to fail. 

In a surprising twist, the US dollar could not thrive despite the tense market mood. The deterioration in risk appetite reignited demand for bonds as a hedge, dragging Treasury yields back down and lessening the dollar’s interest rate advantage. Some reports that the ECB won’t expand its balance sheet further as it attempts to narrow spreads, but will instead neutralize any interventions by selling other bonds it holds, also helped bolster the euro.  

Gold bounces, pound volatile

The combined forces of a retreating US dollar, cooling Treasury yields, and the nervousness in equity markets breathed some life back into gold prices. Bullion managed to reclaim the 200-day moving average, although it is still headed for substantial losses for the week. Rising interest rates globally are acting like a gravitational pull on gold, which pays no interest to hold and is now struggling to compete as bonds have finally started to pay positive real returns. 

Elsewhere, the Bank of England raised interest rates by 25 bps yesterday, which initially sent the pound lower as those looking for a bigger move were left disappointed. However, the move quickly reversed and sterling closed the session higher overall as the BoE signaled it could take more forceful action. Market pricing of a 3% Bank Rate by year-end still seems excessive considering the weakening data pulse. 

The economic calendar today is low key but that doesn’t mean it will be a quiet session, as it is quadruple witching day. This is when options and futures on stocks and indices expire, which can generate serious volatility, especially since US markets will remain closed on Monday. Fed Chair Powell will also deliver some remarks at 12:45 GMT. 

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