Marketmind: New records in sight as BOJ clears decks

[December 19, 2023]  A look at the day ahead in U.S. and global markets from Mike Dolan

The Bank of Japan deferred any further tightening of its ultra-loose money policy until next year, becoming the last of the G4 central banks to clear the decks for the year and leaving Wall St stocks sizing up all time highs.

With global investors already pumped up by the prospect of U.S. and European interest rate cuts next year, the Bank of Japan kept its main policy rate negative on Tuesday as expected, waiting for more evidence on wage growth and prices to justify a shift away from its ongoing monetary stimulus.

"We still need to scrutinize whether a positive wage-inflation cycle will fall in place," BOJ boss Kazuo Ueda said, making no formal change to the bank's guidance.

As some traders had feared, the BOJ may tweak its language to suggest a near-term end to negative interest rates, the status quo saw the yen slide more than 1% and Japanese stocks surge more than 1%.

All of which appeared to clear the way for increasingly bullish year-end markets, with MSCI's all-country index stalking last week's near 20-month highs.

And even though some Federal Reserve and European central banks officials have tried to push back against what they saw as excessive easing speculation in recent days, San Francisco Fed boss Mary Daly underlined the direction of travel at least.
 

Daly told the Wall Street Journal Fed rate cuts are likely be appropriate next year because of an improvement in inflation and there was a risk of the policy stance being too tight.

"We don't give people price stability but take away jobs," she said.

The comments will encourage bond bulls and may spur ebullient Wall St stock indexes into record territory.

Ten-year Treasury yields tested 3.90% again first thing on Tuesday, close to 5-month lows, with the so-called 'term premium' sinking back over the past week to its most negative since September.

Stock futures nudged up again ahead of the bell, with the S&P500 hitting 23-month highs on Monday and coming within 1.4% of new all-time records. The Nasdaq 100 got to within a whisker of new records too, with the NYFANG index of digital and tech megacaps soaring to unprecedented levels and more than double what it was on January 5.

Spotlighting the burst of investor optimism, Bank of America's latest global fund manager survey showed asset managers were are at their most overweight equities relative to cash since January 2022 - and yet with more fuel in the tank because they were still overweight cash per se, even if by the least amount since April 2021.

A screen displays the Dow Jones Industrial Average after the closing bell on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., December 15, 2023. REUTERS/Brendan McDermid/File Photo

It's been a bruising time for short sellers. The unexpected U.S. share rally last week has sent hedge funds scrambling to cover their bearish short bets against U.S.-listed companies, UBS said on Tuesday.

The dollar was mixed again - clearly higher against the yen, but off against the euro and sterling.

Background jitters about shipping threats in the Red Sea seemed to dissipate quickly. Crude oil prices fell back again from Monday's highs and are still tracking near 5% year-on-year declines.

Shipping prices also continued to ebb from recent highs, and were more than 30% off peaks set two weeks ago.

Housing starts top the U.S. data diary later, with Fed speakers in the mix too and FedEx results due as well. Canada's markets will eyeball the latest inflation numbers there.

Deals activity remained brisk.

UBS shares rose 1.6% after activist investor Cevian Capital took a 1.3% stake in the bank.

Nippon Steel said on Tuesday its $14.1 billion deal to buy U.S. Steel would help it tap into a new growth market as concerns over the huge premium the world's fourth largest steelmaker was paying hit its shares by as much as 6%.

Apple said on Monday it would pause sales of its Series 9 and Ultra 2 smartwatches in the United States from this week, as it deals with a patent dispute over the technology that enables the blood oxygen feature on the devices. Its stock was off about 0.5% in Frankfurt trading.

Key developments that should provide more direction to U.S. markets later on Tuesday:

* U.S. Nov housing starts/permits, Oct Treasury TIC data on flows and overseas holdings of U.S. government securities, Canada Nov consumer price inflation

* Chicago Federal Reserve President Austan Goolsbee; Atlanta Fed chief Raphael Bostic European Central Bank , Bank of England Deputy Governor, Financial Stability, Sarah Breeden

* U.S. corporate earnings: FedEx, Accenture, Factset Research

(Editing by Bernadette Baum)

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