LDN - Business

Stocks tiptoe higher before Fed, yen intervention alarms flare

[November 01, 2023] By Ankur Banerjee and Lawrence White

SINGAPORE/LONDON (Reuters) - Subdued stocks inched higher on Wednesday ahead of a policy decision from the Federal Reserve later in the day, while the yen was stuck near one-year lows against the dollar as Tokyo ramped up intervention warnings.

Europe's benchmark STOXX index rose 0.46%, more positive than the 0.1% gain in MSCI's broadest index of Asia-Pacific shares outside Japan which has clocked three straight months of losses.

Japan's Nikkei was 2% higher as investors remained on red alert for yen-buying intervention from authorities to try to scrape the currency off the floor after recent central bank policy tweaks failed to reverse its recent losses.

The spotlight on Wednesday will meanwhile firmly be on the Federal Reserve's policy decision, with the central bank widely expected to hold rates steady.

Comments from Fed Chair Jerome Powell will be scrutinised to gauge where interest rates are headed and how long they will stay higher.

Erik Weisman, chief economist and portfolio manager at MFS Investment Management, said the Fed would keep the option of future rate hikes firmly on the table until the labour market cools considerably and inflationary pressures ease.

"Chairman Powell will also argue that the lagged effects of past hikes have not fully impacted the economy and that patience is prudent," Weisman said.

Markets are pricing in a 29% chance of a 25 basis point hike in December and a 35% chance of a 25 bps hike in January, the CME FedWatch tool showed.

U.S. stocks looked set for a shakier start on Wednesday, with S&P e-mini futures, NASDAQ futures and DOW futures all down around 0.21%.

Treasury yields remained elevated, with the yield on 10-year Treasury notes up 4 basis points to 4.914%. The yield on the 30-year Treasury bond was up 5.3 basis points to 5.077%. [US/]

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 0.8 basis points at 5.079%.

Claudio Irigoyen, global head of economics at BofA Global Research, said the most important question for the next three to five years in the discussion about U.S. fiscal policy is whether interest rates will go back to pre-pandemic levels.

"Or if this is a new regime of higher real interest rates," Irigoyen said. "And I think that I am more on the camp of the second option."

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A worker shelters from the rain under a Union Flag umbrella as he passes the London Stock Exchange in London, Britain, October 1, 2008. REUTERS/Toby Melville/File Photo

YEN VIGIL

Market focus in Asia was firmly on the yen in the wake of the Bank of Japan's decision to tweak its bond yield control policy again on Tuesday, further loosening its grip on long-term interest rates.

The move drove a broad slide in the yen on Tuesday, sending it tumbling to a one-year low against the dollar and touching a 15-year low against the euro as investors had expected a bigger BOJ step towards ending years of massive monetary stimulus.

"The market has seen the tweak to a flexible regime as clear dovish development," said Chris Weston, head of research at Pepperstone.

"Once again market players have been left frustrated by the lack of urgency shown by the BOJ, and either closed yen longs or flipped into outright yen shorts."

The sharp drop in the yen prompted a fresh and sterner warning from Japan's top currency diplomat Masato Kanda that authorities were on standby to respond to recent "one-sided, sharp" moves in the currency.

The yen strengthened 0.24% to 151.31 per dollar following the comments but remained close to one-year lows of 151.74 it hit on Tuesday and the three-decade low of 151.94 touched last year, which triggered an intervention by Tokyo at the time.

Against a basket of currencies, the dollar was up 0.12% at 106.79. Sterling was last at $1.2151, down 0.2% on the day.

Data on Wednesday showed Asia's manufacturers faced worsening pressure in October with factory activity in China slipping back into decline, clouding recovery prospects for the region's major exporters already squeezed by weaker global demand and higher prices.

Oil prices rose ahead of the Fed decision, with the market keeping a close eye on the latest developments in the Israel-Hamas conflict, as geopolitical risks offset record production levels in the U.S.

U.S. crude rose 0.43% to $81.45 per barrel and Brent was at $85.55, up 0.62% on the day. [O/R]

(Reporting by Ankur Banerjee in Singapore and Lawrence White in London, additional reporting by Tom Westbrook; Editing by Shri Navaratnam, Miral Fahmy and Alison Williams)

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