Global shares rise, but face patchiest yearly performance since 2008

That triggered a leap in the yen, which had spent most of the year sliding because of Japan’s low yields, as well as selling in Japan’s stock market and a selloff for bonds around the world.

The decision by the BOJ, the last dovish bastion in the central bank world, has added to concern among investors about how the impact of rising interest rates and persistent inflation will affect the global economy.

Fund managers are adopting an extremely cautious approach to the start of 2023 and, as such, trading conditions are thin and highly volatile.

"We think recessions are coming in the US and Europe but its very hard to gauge the amplitude of these recessions right now. This makes it very hard to evaluate earnings potential for 2023 and so it is also very hard to do the usual reasoning about valuations," Bastien Drut, chief thematic macro strategist at CPR, a unit of Amundi, Europe’s largest asset manager.

"We've taken profits from the rally in November and our positioning in equities is rather low,” he said.

The STOXX 600 rose almost 1%, led by the retail sector, where German rivals Adidas and Puma rose 8.4% and 6.9%, respectively, while UK sports apparel merchant JD Sports gained 5.3%, which helped the FTSE 100 gain 0.9%.

The dollar meanwhile clawed higher against a basket of major currencies, which in turn nudged the gold price off six-month highs, while crude oil bounced by 2% following data that showed a pickup in weekly demand.

The U.S. currency saw its largest one-day fall against the yen in 24 years on Tuesday, dropping almost 4% after the BOJ said it would let long-term interest rates fluctuate more widely. By Wednesday, it was flat against the yen at 131.665, close to its lowest since early August.

Some of the major drivers of dollar gains – an ever weaker yen, a struggling Chinese yuan and outsized rises in U.S. yields – are starting to shift. The euro held steady at $1.0627, not far from last week’s six-month high.

Carry Trades

Bond markets were kept under pressure as the last big central bank anchoring its bond market starts to loosen its iron grip on yields.

Not just that, the worry that Japan’s yield-seeking big investors in overseas markets will have to shed some of those ”carry” trades to make up for a rising yen and bond losses at home drove markets, with Aussie bonds selling off heavily and Asian currencies such as the Singapore dollar on the backfoot.

”There appears to be growing caution about inadvertent ”risk off” from unwinding ”carry” and knock-on impact in risk assets,” analysts at Mizuho wrote.

Citi analysts said the calm in equity markets might not last, and things could get volatile in thinned year-end trading.

”Our equity traders caution that the most under-priced market risks are roughly how high the structural inflation floor will settle in a post-COVID world.

”We know the Fed is resolutely committed to seeing inflation taper down to 2% and stay there, which suggests it may need to create a lot more pain than markets currently discount in order to reach its target,” they said in a note.

Benchmark 10-year Treasury yields were unchanged on the day at 3.681%, having touched an overnight high of 3.772%. Japanese 10-year yields closed up 7 bps at 0.48%, close to the BOJ’s 0.5% ceiling. [JP/]

Brent crude futures rose 2% to $81.59 a barrel, after data showed privately held inventories of oil fell unexpectedly in the latest week.