LONDON—Japan’s long-suppressed yen surged and global bond and stock markets flinched on Thursday, as Tokyo’s monetary policymakers gave their clearest hints yet that the exit from ultra-low interest rates was approaching.
The yen rose 1.5 percent against the dollar, its biggest one-day jump since January, and looked set to extend its post-COVID-19 record of finishing years 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 percent weaker in early European trading.
Bank of Japan 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 come next.
Money markets started pricing in a near 40 percent chance that the BoJ changes its course at its final meeting of the year on December 19. Japanese government bonds also saw a sharp selloff, with yields on 10-yr JGBs jumping 11.5 basis points.
Societe Generale strategist Kit Juckes said end of year yen rallies had become something of a habit since the pandemic but this move looked different and SocGen sees it as precursor for a strong move up 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,” Mr. Juckes 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 U.S. Treasuries you are supposed to think there is a bull market in the yen too.”
In recent weeks, the rally in bond markets and fall in global borrowing costs has seen world stocks rise 10 percent and volatility, as measured by the VIX index, drop to its lowest since before the COVID-19 pandemic.
Thursday’s action put a temporary stop to that however.
Traders are turning their focus to the weekly U.S. jobless claims data later in the day, ahead of the non-farm payroll report due on Friday. Economists expect the economy added 180,000 new jobs in November, picking up from 150,000 the previous month.
Oil Swings
The yen’s big move knocked the dollar index down 0.3 percent to under 104. Markets have priced in so many Federal Reserve rate cuts recently that traders feel vulnerable to an upside surprise in U.S. data.The yield on the benchmark U.S. 10-year Treasury note bounced off a three-month low to 4.1515 percent although Germany’s 10-year bond yield, the benchmark for the eurozone, was barely budged at 2.205 percent just above a 7-month low.
Sentiment on China was still bearish after Moody’s slapped a downgrade warning on China’s credit rating and cut outlooks for Hong Kong, Macau, and Chinese local 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 down 0.2 percent after hitting a five-year trough earlier in the session. Hong Kong’s Hang Seng index fell to a 13-month low.
The main commodity markets remained choppy too. Oil prices steadied after falling nearly 4 percent on Wednesday—that had been welcome news for those still nervy about inflation although it does not bode well for the health of the globally economy.
Brent crude futures recovered 1 percent to $75 a barrel while U.S. West Texas Intermediate futures rose 0.6 percent to $69.85 a barrel. Gold prices also ticked higher to $2,033 per ounce.
