Central Bank Surprises and BOJ Policy Shift Roil Global Markets
Market Reactions to Central Bank Decisions
A look at the day ahead in European and global markets from Rocky Swift
Central Bank Moves: Surprises and Expectations
A week punctuated by central bank surprises ended with the Bank of Japan delivering policy as expected. Almost.
It hardly matches the shock hold on interest rates by the Reserve Bank of New Zealand or Christine Lagarde's early resignation as head of the European Central Bank, but alongside its expected hold on rates, the BOJ said it would speed up its selloff of stocks.
It will now take a mere 43 years to unwind all the BOJ's purchases of Japanese exchange-traded funds instead of 112 years under the previous pace, the central bank said.
The BOJ's ETF Strategy and Market Impact
Old market hands will remember what came to be called the "1% rule" in 2011, where if the Topix stock gauge fell by that amount or more in the morning session, the BOJ would swoop in and buy ETFs in the afternoon.
And in so doing, though not always at that speed, the central bank came to spend 37.19 trillion yen through March 2024 propping up Japan's stock market. And with significant gains in Japanese stocks over the past few years, the BOJ is sitting on a tidy windfall for its efforts.
Future Rate Hikes and Policy Normalization
After the BOJ's rate hike to a 31-year high of 1.25% in September, markets now expect the next increase in December or January as Governor Kazuo Ueda doggedly pursues his mission to normalise policy after more than a decade of massive, experimental stimulus.
Holding such a mountain of shares is "unhealthy for the central bank," said Tohru Sasaki, a former BOJ official who is now chief strategist at Fukuoka Financial Group, adding that the timing of the divestiture announcement is not ideal, given how fragile markets are.
Global Market Movements and Investor Sentiment
Asia carried on the tech rout on Wall Street overnight, with Japan's Nikkei gauge down 3% at one point. China's blue-chip headed for its largest monthly fall in a decade on concerns of slumping demand for chips and other inputs for the AI sector.
Investors flocked to the safe haven of bonds. Benchmark 10-year US Treasury yields fell by more than 7 basis points (bps) in Tokyo trade, set for the largest one-month drop since December 2023. The 10-year Japanese government bond yield tumbled 5.5 bps to 2.780%, set for the lowest close since August 6.
Futures point to more misery in Europe and the US. The pan-region Euro Stoxx 50 futures were down 0.43%, German DAX futures slid 0.2% at 26,107, while FTSE futures were an outlier, up 0.2%.
US stock futures, the S&P 500 e-minis, sank 0.89%.
Upcoming Earnings and Economic Data
Still ahead is a heavy day of earnings in the US and a raft of data in Europe.
Key Developments to Watch
Key developments that could influence markets on Friday:
- US earnings: AbbVie, Chevron, Colgate-Palmolive, Dominion Energy, ExxonMobil Holdings
- Europe earnings: AstraZeneca, Credit Agricole, Sanofi
- United Kingdom - Reopening of 1-month, 3-month and 6-month government debt auctions
- Q3 GDP for euro zone, France, Germany
- France consumer spending, CPI
- Germany import prices, unemployment, CPI
- UK house prices
(Editing by Saad Sayeed)
