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Stock markets come back to life, BoJ sacrifices the yen


Stocks headed for solid weekly gains despite lingering risks

Dollar softens but yen performs even worse as BoJ lags behind

BoE raises rates in a cautious manner, dealing a blow to sterling

Wall Street comeback

Hopes for a peace deal in Ukraine and signals that China will open the stimulus taps wider helped global equity markets to shake off the blues this week, even as many of the risks behind the recent rout continue to linger. Between the ongoing war, roaring inflation, central banks raising rates, and the growing possibility of a recession, investors have had a lot on their plates this year.

When so many narratives clash, it is often a recipe for explosive market moves. Money managers are forced to play some defense by trimming risk and deleveraging, waiting for the right opportunity to jump back in. Some of them dipped their toes back into the market this week, lured in by equity valuations reaching pre-pandemic levels and a sense that most of the ‘bad news’ is already priced in.

The S&P 500 extended its winning streak yesterday and is headed for weekly gains of around 4%, with the Nasdaq putting on an even more impressive performance. It’s difficult to say whether the market has bottomed already, but it looks like the worst phase of the storm is over.

An aggressive pace of central bank tightening has already been baked in, valuations have come back to earth, and everyone is hedged. Sentiment has been hit with everything but the kitchen sink lately and unless there truly is a recession, it’s difficult to see what will keep pushing this market lower.

Yen falters, dollar on back foot

In the FX spectrum, the yen has been the biggest casualty this week amid a double whammy of improving risk appetite and widening rate differentials between Japan and the rest of the world.

The Bank of Japan concluded its meeting earlier today and refrained from signaling any policy changes, happy to lag behind the rest of the world in exiting cheap money even if that means offering the yen as a sacrificial lamb. It’s difficult to envision a real trend reversal until the BoJ joins the global normalization party.

It’s been a tough week for the US dollar too, despite the Fed trying its hardest to engineer a stronger currency. Yield differentials actually widened in the dollar’s favor but that was eclipsed by the improvement in risk sentiment, with hopes for a ceasefire in Ukraine driving the ship instead.

BoE turns cautious, euro shines

Elsewhere, the Bank of England raised rates by a quarter point yesterday, disappointing those looking for a bigger move. There was a clear sense of caution among policymakers, who toned down their optimism around the economy and adjusted their forward guidance to open the door for a potential pause in tightening. Sterling fell initially but managed to recover later along with the risk tone.

The big winners of the week have been the euro and the commodity-linked dollars. The euro is entirely at the mercy of war headlines at this stage. While bets for peace have allowed the single currency to recover lately, it may be time to pay the piper next week as the latest business surveys will reveal the economic fallout from the war and whether Europe is tipping into recession.

There isn’t much left on the agenda for today. A phone call between the American and Chinese leaders will be in the spotlight, amid hopes that Xi Jinping may leverage his good relationship with Moscow to help broker a peace agreement.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-stock-markets-come-back-to-life-boj-sacrifices-yen-157024
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