Glittering gold gives markets some Christmas cheer

SINGAPORE  – Asian stocks were trying to get into a festive mood on Wednesday and managed small gains, with even Japan’s Nikkei lifting off a two-month low it hit following the Bank of Japan’s surprise decision to loosen its tight leash on government bond yields.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.4 percent. Japan’s Nikkei was down 0.4 percent, paring earlier losses of around 1 percent. Gold miners in Australia led a 1.3-percent jump for the S&P/ASX 200.

Wall Street snapped a four-day losing streak overnight and S&P 500 futures rose 0.5 percent in Asia trade.

European stock futures indicated a firm open too, with the Eurostoxx 50 futures up 0.74 percent, German DAX futures up 0.83 percent and FTSE futures up 0.39 percent.

On Tuesday, the Bank of Japan (BOJ) widened its trading band for 10-year government bond yields from 25 basis points (bps) either side of zero to 50 bps.

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

The resultant drop for the U.S. dollar has spot gold prices testing six-month peaks and gold miners riding high. Newcrest rose 6 percent in Sydney and smaller names even more. Global miners BHP and Rio Tinto rose 2 percent.

Spot gold bought $1,816 an ounce.

“The tone is good, we’re having our little version of a Santa Claus rally,” said Damian Rooney, a dealer at Argonaut Securities in Perth, referring to typical late-December gains as markets drift toward the year end.

The yen mostly held on to large gains from Tuesday, at 132.18 per dollar, and traders were getting positioned for further dollar losses.

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 at $1.0615, 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 percent 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 rose four bps to a three-week high of 3.722 percent. Japanese 10-year yields rose 5.5 bps to 0.45 percent, close to the BOJ’s 0.5 percent ceiling.

Brent crude futures hovered at $80.24 a barrel.