Asian shares rise, yen climbs as BOJ battles bond bears

Asian shares firmed on Monday as optimism about China's reopening offset concerns the Bank of Japan (BOJ) might temper its super-sized stimulus policy at a pivotal meeting this week, while a holiday in US markets made for thin trading.

The yen climbed to its highest since May after rumours swirled the BOJ might hold an emergency meeting on Monday as it struggles to defend its new yield ceiling in the face of massive selling.

That had local markets in an anxious mood, and Japan's Nikkei slipped 1.3% to a two-week low.

Yet MSCI's broadest index of Asia-Pacific shares outside Japan still added 0.9%, with hopes for a speedy Chinese reopening giving it a gain of 4.2% last week.

Chinese blue chips extended their rally with a rise of 2.0%, while the yuan reached its highest since July.

EUROSTOXX 50 futures STXEc1 added 0.6%, while FTSE futures FFIc1 put on 0.1%. S&P 500 futures ESc1 and Nasdaq futures NQc1 edged up 0.1%, after a Wall Street bounce last week.

Earnings season gathers steam this week with Goldman Sachs, Morgan Stanley and the first big tech name, Netflix, among those reporting.

World leaders, policy makers and top corporate chiefs will be attending the World Economic Forum in Davos, and there are a host of central bankers speaking, including no fewer than nine members of the US Federal Reserve.

The BOJ's official two-day meeting ends Wednesday and speculation is rife it will make changes to its yield curve control (YCC) policy given the market has pushed 10-year yields above its new ceiling of 0.5%. 

The BOJ bought almost 5 trillion yen ($39.12 billion) of bonds on Friday in its largest daily operation on record, yet yields still ended the session up at 0.51%.

Early Monday, the bank offered to buy another 1.3 trillion yen of JGBs, but the yield stuck at 0.51%.

"There is still some possibility that market pressure will force the BOJ to further adjust or exit the YCC," JPMorgan analysts said in a note. "We can't ignore this possibility, but at this stage we do not consider it a main scenario."

"Although domestic demand has started to recover and inflation continues to rise, the economy is not heating up to the extent that a sharp rise in interest rates and potential risk of large yen appreciation can be tolerated," they added. "Thus, we think the economic environment does not strongly support consecutive policy changes."

THE YEN UN-ANCHORED

The BOJ's uber-easy policy has acted as a sort of anchor for yields globally, while dragging down on the yen. Were it to abandon the policy, it would put upward pressure on yields across developed markets and most likely see the yen surge.

The dollar is already at its lowest since May at 127.22 yen JPY=EBS, having shed 3.2% last week, and threatens to break major support around 126.37.

The euro also lost 1.5% on the yen last week, but was aided by gains on a broadly softer dollar, which saw it reach a fresh nine-month peak of $1.0872 EUR=EBS on Monday.

All of which saw the US dollar index =USD ease to its lowest since June at 101.780.

The dollar has been undermined by falling US bond yields as market wagers the Federal Reserve can be less aggressive in raising rates given inflation has clearly turned the corner.

Futures now imply almost no chance the Fed will raise rates by half a point in February, with a quarter-point move seen as a 94% probability.

Yields on 10-year Treasuries are down at 3.51%, having fallen 6 basis points last week, close to its December trough, and major chart target of 3.402%.

Alan Ruskin, global head of G10 FX Strategy at Deutsche Securities, said the loosening of global supply bottlenecks in recent months was proving to be a disinflationary shock, which increases the chance of a soft landing for the US economy.

"The lower inflation itself encourages a soft landing through real wage gains, by allowing the Fed to more readily pause and encouraging a better behaved bond market, with favourable spillovers to financial conditions," Ruskin said.

"A soft landing also reduces the tail risk of much higher US rates, and this reduced risk premia helps global risk appetite," Ruskin added.

The drop in yields and the dollar has benefited gold, which jumped 2.9% last week and was trading at the highest since April at $1,927 an ounce.

Oil prices also rallied last week on hopes the speedy reopening of China would boost demand. Data on mobility, traffic and transport trips in China have shown a sharp revival in movement ahead of the Lunar New Year holidays next week. 

Chinese data on economic growth, retail sales and industrial output due this week are certain to be dismal, but markets will likely look past that to a rapid recovery now coronavirus restrictions have been dropped.

Prices eased back a touch on Monday, with Brent LCOc1 off 45 cents at $84.83 a barrel, while US crude CLc1 fell 38 cents to $79.48.