BoJ’s surprise move caught all the attention: S&P 500, USD/JPY, Straits Times Index

Market Recap

Despite initial weakness, major US indices managed to eke out a positive close overnight (DJIA +0.28%; S&P 500 +0.10%; Nasdaq +0.01%), following four consecutive days of sell-off. The VIX was sharply lower (-4.2%), failing to see any significant pick-up in recent days as we trend in a seasonally stronger year-end period for the indices. The Bank of Japan (BoJ)’s decision to widen the band for its 10-year Japanese Government Bonds (JGB) from previous 0.25% to 0.5% has caught all the market attention yesterday. With the BoJ now owning more than 50% of the JGB market, this seems like a move to support the functioning of its bond markets and the way is paved for further shift in policy over the longer term. Market expectations for a rate hike from the BoJ has been shifted forward, with views that the BoJ will enact a rate hike in March or April next year before the BoJ Governor Kuroda’s term ends to lay the groundwork for the next successor. The move was viewed with a tint of ‘hawkishness’ by markets, which drove a sharp fall in the USD/JPY (大口）, along with equities on the need for a higher return trade-off.

As sentiments attempt to recover from the BoJ’s surprise, the US Conference Board consumer confidence data in lined up on the economic calendar. That said, the greater focus may be on the US core Personal Consumption Expenditures (PCE) price index tomorrow. With the recent Federal Reserve (Fed) meeting bringing about an upward revision in US core PCE forecasts in 2023, the data will be looked upon to reflect the pace at which pricing pressures moderate. For the S&P 500, the bearish rejection off a downward trendline and a break below its rising channel pattern reiterate its overall downward bias. But for now, some dip-buying efforts have been reflected in the bullish pin bar formation, with sentiments attempting to tap on the year-end seasonality for some relief.

Asia Open

Asian stocks look set for a mixed open, with Nikkei -0.99%, ASX +1.50% and KOSPI -0.14% at the time of writing. The Nikkei 225 index continues to see some shunning with the BoJ’s latest move, considering that equities’ return is now pitted against a higher risk-free rate in the benchmark 10-year JGB, which reduces some traction for equities amid the challenging economic outlook. Longer-term implications of the move may include the outflow of capital from foreign assets, with the JGBs now providing a higher return and reducing the yield-differential attractiveness. This may drive upside risks to bond yields elsewhere, which could weigh on global equities. On the other hand, the diverging performance in the ASX 200 to the upside was driven by the latest Reserve Bank of Australia (RBA) minutes, which showed the central bank considering a pause in rate hikes at its December meeting.

With the sharp downside move in the USD/JPY (大口） yesterday, its 200-day moving average (MA) has been breached, which is generally looked upon as an indication of longer-term trend. There may be some attempts to recover in the near term after coming close to a lower channel trendline support, but the overall bias remains to the downside on the formation of new lower highs and lower lows. Further downside move could leave the 126.70 level on watch next.

On the watchlist: Straits Times Index remains stuck in a consolidation pattern

As we head into the year-end festive period which generally brings about lower trade volume, the Straits Times Index (STI) remains fairly stuck within a consolidation zone. The latest SGX fund flow data revealed muted fund flow activities last week, with institutional and retail net inflows of just S$7.9 million and S$5.7 million respectively. That said, the STI has been one of the more resilient index year-to-date (+1.5%), tapping on its defensive status in the region for some traction amid the global economic challenges. Trading within the consolidation range will place the upper bound resistance at the 3,320 level and lower bound support at the 3,230 level. Both relative strength index (RSI) and moving average convergence/divergence (MACD) are trending lower, which suggests moderating momentum for now, with the index largely on hold for a greater catalyst to drive further moves.

Tuesday: DJIA +0.28%; S&P 500 +0.10%; Nasdaq +0.01%, DAX -0.42%, FTSE +0.13%