By Huw Jones
LONDON (Reuters) – Stocks largely held their ground on Friday as investors pondered what a policy shift by the Bank of Japan would mean for global markets hoping that central banks were nearing the end of their rate hiking cycle and its fallout on assets.
U.S. stock futures were firmer, though the U.S. Commerce Department is due to release its hotly anticipated Personal Consumption Expenditures (PCE) report before the opening bell on Wall Street.
The Bank of Japan made its yield curve control policy more flexible and loosened its defence of a long-term interest rate cap, seen by investors as a prelude to a shift away from years of ultra-loose monetary policy.
The move caps a big week for central banks, with interest rate rises in the U.S. and Europe in recent days seen as the final moves in the most aggressive hiking cycle in a generation, with the Bank of England meeting next week.
The yen initially jumped after the BOJ moves before going into a tailspin, while hopes for stimulus had Chinese stocks heading for their best week since last November.
Oil was on track for a fifth straight week of gains after news that the U.S. economy grew faster than expected in the second quarter, but gold was braced for its biggest weekly decline in five weeks.
The MSCI All Country stock index was little changed at 700 points, still up more than 15% for 2023, returning to levels last seen in the second quarter of 2022.
“Equity markets are looking fairly positive on the basis that we are closer to the end of their rate hiking cycle than we have ever been,” said Mike Hewson, chief markets strategist at CMC Markets.
In Europe, the STOXX index of 600 companies was down 0.2% after hitting a 17-month high on Thursday when the European Central Bank raised interest rates to their highest level in over two decades and left open the possibility of a pause at its next meeting.
The Dow Jones Industrial Average on Wall Street snapped its longest winning streak since 1987 on Thursday, but Patrick Spencer, vice chair of equities at Baird, believes that a bull market remains in place, even if a little overbought, and that a modest correction would be no surprise.
“People are waiting for weakness in the market to re-enter as earnings have been good. The reality is that the underlying economy, especially in the States, not so much in Europe, still remains quite strong,” Spencer said.
A mixed economic picture emerged from euro zone data on Friday, with French and Spanish economies displaying unexpected resilience in the second quarter, while Germany stagnated.
BANK OF JAPAN SHIFT
The Bank of Japan’s policy shift could have seismic implications for global money flows, since a cheap yen that’s been inexpensive to borrow has been a mainstay of capital market funding for years, and it now faces upward pressure from rising Japanese yields just as global rates seem to peak.
Yields on euro zone government bonds surged on news of the Japanese move which could make Japanese assets more attractive to domestic investors.
Ten-year Japanese government bond yields hit a nine-year high of 0.575%, later trading at 0.540%, and the Nikkei dropped 0.4%, with financial stocks surging in anticipation of higher rates.
The yen which had gained for days on speculation of a BOJ move, was choppy after the announcement, before gaining to hit a week-high of 138.05 to the dollar, later trading at 139.045.
“We’re really at the beginning of the end of really extreme monetary accommodation but they still sound very cognisant of … downside risk to the economy and inflation outlook,” said Sally Auld, chief investment officer at JB Were in Sydney.
Ten-year U.S. Treasury yields, which had climbed overnight on stronger-than-expected U.S. data and talk of Japan’s tweak, dipped to 3.9646%.
The U.S. dollar was broadly stronger, especially against the Australian dollar – down 06% to $0.66705 – which was weighed after retail sales suffered their biggest fall of the year in June, suggesting less need for another rate hike.
The euro eased 0.3% to $1.100.
Brent crude oil futures slipped 0.3% from three-month highs to $83.96 a barrel.
(Editing by Shri Navaratnam, Christian Schmollinger, Kim Coghill and Nick Macfie)
