Global Markets Report - 21 December

Australia

Australian shares are set to gain today following a rocky session on Wall Street. Investors fretted after the Bank of Japan unexpectedly raised the cap on its bond yield by 0.25%.

ASX futures were up 72 points or 1% at 7102 as of 7:00am on Wednesday, signalling a positive start to the trading day.

US stock indices wobbled while bond yields rose after the Bank of Japan surprised investors by raising the cap on its government bond yield, inching away from its ultra-relaxed monetary policies.

The S&P 500 edged down before rising 0.3% near the end of trade Tuesday. The technology-focused Nasdaq Composite edged up 0.2% while the Dow Jones Industrial Average added 0.5%. On Monday, the indices closed lower for the fourth consecutive session.

Out of the 11 sectors in the S&P 500, only consumer discretionary and consumer staples were lower in early afternoon trading.

The policy adjustment out of Japan took markets by surprise, with the meeting taking place toward the end of Gov. Haruhiko Kuroda's 10 years in office. Most central banks across the globe have already started tightening monetary policy to tame inflation and catch up to the US dollar, with Japan one of the few outliers.

In commodity markets, Brent crude oil edged up 0.11% to $US79.89 a barrel and gold added 1.66% to US$1,817.25.

In local bond markets, the yield on Australian 2 Year government bonds increased to 3.26% while the 10 Year rose to 3.72%. Overseas, the yield on 2 Year US Treasury notes declined to 4.27% and the yield on 10 Year US Treasury notes edged down to 3.69%

The Australian dollar hit 66.72 US cents down from the previous close of 66.98. The Wall Street Journal Dollar Index, which tracks the US dollar against 16 other currencies, decreased to 97.1.

Asia

Chinese shares extended losses today, tracking the fall in regional markets, as investors took a breather from the rally fueled by China's reopening from Covid and braced for a potential recession. Almost every sector from consumption related companies to banks slipped. The food and real estate sectors saw significant losses, with index heavyweight Kweichow Moutai falling 3.3% and Greenland Holdings dropping 3.4%. Chip makers defied the market's downtrend, with Semiconductor Manufacturing International Corp. increasing 0.2%. The Shanghai Composite Index dropped 1.1% to 3073.77, closing below the psychologically important 3100 level. The Shenzhen Composite Index lost 1.2% and the ChiNext Price Index was 1.5% lower.

Hong Kong's Hang Seng Index ended 1.3% lower at 19094.80. Most sectors from tech to transport suffered losses. Shares of Agile Group and CIFI Holdings slumped 17% and 16.5% respectively after the two property developers said they plan to raise money via share placements to refinance their offshore debt. The Hang Seng Tech Index dropped 3.1%, falling below the 4000 level to end at 3996.36. Among tech stocks, Baidu slid 4.1% and Tencent shed 3.4%, trimming their gains since China announced its reopening.

Japanese stocks ended sharply lower, dragged by falls in the real estate and auto sectors, after the Bank of Japan loosened its yield control, letting the yield curve shift higher. Sumitomo Realty & Development dropped 5.5% and Nissan Motor lost 5.0%. The Nikkei Stock Average fell 2.5% to 26568.03, its biggest percentage point drop since Oct. 11.

Europe

Most European stocks fell after analysts said a bond yield-related change by the Bank of Japan increased the likelihood of interest-rate rises. The pan-European Stoxx Europe 600, the French CAC 40 and the German DAX each retreated about 0.4%, though the British FTSE 100 edged 0.1% higher as sterling fell against the dollar and euro.

Eurozone government bond yields were trading higher after the Bank of Japan adjusted the yield-curve-control policy in a surprise move.

This adjustment, whereby the BoJ would allow the 10-year Japanese government bond yield to rise to 0.5% from a previous cap of 0.25%, "is widely seen as the beginning of a potential end to their ultra-loose monetary policy," Deutsche Bank's strategists wrote in a note. "It's important not to underestimate the impact this could have, because tighter BoJ policy would remove one of the last global anchors that's helped to keep borrowing costs at low levels more broadly," Deutsche Bank's Jim Reid wrote.

European bank stocks were trading higher on Tuesday afternoon as investors digested the prospect of further interest-rate hikes after the hawkish intervention from the Bank of Japan. Germany's Commerzbank was up 7.1%, Deutsche Bank rose 4.3%, Italy's UniCredit was 2.8% higher, while Spain's Santander was up 2.5%, BBVA climbed 2.4% and Unicaja jumped 6.1%.

North America

US stock indices wobbled while bond yields rose after the Bank of Japan surprised investors by raising the cap on a benchmark rate, inching away from its ultra-relaxed monetary policies.

The S&P 500 edged down before rising 0.3% near the end of trade Tuesday. The technology-focused Nasdaq Composite edged up 0.2% while the Dow Jones Industrial Average added 0.5%. On Monday, the indices closed lower for the fourth consecutive session.

Out of the 11 sectors in the S&P 500, only consumer discretionary and consumer staples were lower in early afternoon trading.

The policy adjustment out of Japan took markets by surprise, with the meeting taking place toward the end of Gov. Haruhiko Kuroda's 10 years in office. Most central banks across the globe have already started tightening monetary policy to tame inflation and catch up to the US dollar, with Japan one of the few outliers.

Though the BOJ's interest rate increase is small compared with those made in the US, analysts and investors worry that this marks an end to the yearslong era of easy money everywhere.

Tightening monetary policy in the US and elsewhere has been a major concern for investors. Recent data has suggested the Federal Reserve's interest rate increases are succeeding in tempering inflation, but Fed officials have signaled their intention to continue to raise rates and keep them elevated for longer than many investors had anticipated.

Yields rose on US Treasurys, which have largely trended lower in recent weeks as inflation has shown signs of easing. The yield on the benchmark 10-year note rose to 3.687% from 3.581% on Monday. Mr. Brill forecasts investors will turn to US fixed income in 2023 because of the higher yields offered, but rising overseas yields might steer foreign bond investors elsewhere.

"The concern is always, what will happen if local yields become more competitive with US yields, and today's the first step of that?" said Matt Brill, Invesco Fixed Income's head of North America investment grade. "The markets are wondering, where does it stop?"

In stocks, Tesla shares fell 5.2%, with its market capitalization falling below that of Johnson & Johnson for the first time since late 2020. Several analysts have cut their price targets on Tesla stock in recent days.

Tech stocks like Tesla are particularly sensitive to interest rates and have been some of the biggest drivers to this year's roughly 20% decline in the S&P 500 as rates have risen.

Next year "could be the start of a bottoming process, so that's what we're hoping for," said Katie Stockton, founder of Fairlead Strategies and portfolio manager of the Fairlead Tactical Sector exchange-traded fund. Ms. Stockton forecasts that defensive stocks, which have dominated this year, won't be as popular with investors next year.