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Markets fell Tuesday and the yen rallied after Japan announced a surprise tweak to its ultra-loose monetary policy, just as traders were fretting that central bank efforts to tame inflation will tip economies into recession. news online
Sentiment was also being weighed down by a spike in Covid infections in China as officials roll back many of the strict containment measures that have been in place for almost three years.
A so-called Santa rally appears to be eluding investors, with the mood dampened by last week’s warnings from the Federal Reserve and European Central Bank that they will likely push interest rates higher than expected next year.
The remarks dealt a blow to a short rally across equities that had been fuelled by data showing inflation coming down.
Adding to the selling pressure were comments from former New York Fed chief William Dudley, who told Bloomberg Television that any sign of optimism in markets could make monetary policymakers tighten even more.
Tokyo sank more than two percent after the Bank of Japan adjusted its parameters for controlling bond yields, in a shift away from its long-running dovish stance of keeping rates ultra-low to boost the struggling economy.
Inflation in Japan has risen sharply this year, with the consumer price index in October at 3.6 percent, the highest in four decades, though bank boss Haruhiko Kuroda and other officials have said that would be temporary, citing a lack of strong demand and wage rises.
The move sent the yen to 132.30 per dollar, its strongest level since August.
The Japanese unit has been hobbled this year by the BoJ’s determination to stick to its loose monetary policy — hitting a 32-year low of around 150 to the dollar in October — even as the Fed ramped up borrowing costs.
No Santa rally
“This was bound to happen with inflation rising in Japan, it’s just happened sooner than many thought,” Amir Anvarzadeh, of Asymmetric Advisors, said. “It could spark money flowing back into Japan.”
Hong Kong, Shanghai, Sydney, Seoul, Singapore, Wellington, Taipei, Mumbai, Jakarta and Bangkok were also in the red.
London, Paris and Frankfurt all sank at the open.
“Those who were in the camp of a year-end rally are now second-guessing their investment thesis,” said JC O’Hara of MKM Partners.
“The markets may have placed a little too much faith in Santa Claus and the rally he typically brings.”
With few catalysts to drive trade, investors are winding down for the Christmas break, though they are keeping a close eye on developments in China, which is suffering a sharp jump in Covid cases.
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Officials in recent weeks have started to move away from their rigid zero-Covid policy of lockdowns and mass testing following widespread protests.
And while the shift has been welcomed as a much-needed boost to the world’s number-two economy, there is growing anxiety about the immediate impact on businesses and the healthcare system.
“A massive China reopening bounce is giving way to a reality check as investors come to grips with numerous zero-Covid offramp economic and medical issues that China is simply unprepared to handle,” said SPI Asset Management’s Stephen Innes.
“Especially if the predicted 10 million-plus daily Covid cases hit the healthcare system later this month.”
Still, the expected pick-up in demand from the China reopening continues to support commodity prices, with both main oil contracts up more than one percent, extending Monday’s gains.
The impact of Covid and weaknesses in the country’s vast property sector led the World Bank on Tuesday to slash its China growth forecasts to 2.7 percent this year, from 4.3 percent predicted in June. It also revised its forecast for next year from 8.1 percent down to 4.3 percent.
Key figures around 0820 GMT
Tokyo – Nikkei 225: DOWN 2.5 percent at 26,568.03 (close)
Hong Kong – Hang Seng Index: DOWN 1.3 percent at 19,094.80 (close)
Shanghai – Composite: DOWN 1.1 percent at 3,073.77 (close)
London – FTSE 100: DOWN 0.7 percent at 7,312.94
Dollar/yen: DOWN at 132.39 yen from 136.95 yen on Monday
Euro/dollar: UP at $1.0623 from $1.0610
Pound/dollar: DOWN at $1.2146 from $1.2148
Euro/pound: DOWN at 87.44 pence from 87.31 pence
West Texas Intermediate: DOWN 0.2 percent at $75.07 per barrel
Brent North Sea crude: DOWN 0.3 percent at $79.58 per barrel
New York – Dow: DOWN 0.5 percent at 32,757.54 (close)
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Notes from APS Radio News
From the early part of March 2020 to April 15, 2022, the US Federal Reserve had been increasing its holdings by nearly $5 trillion dollars.
It did this each month of that period by buying billions of dollars of corporation and government bonds, in effect, infusing massive amounts of money into the economy.
And, as the FRED graph shows, it did so at rapid rate or at a high rate of velocity.
Economists say that when massive amoutns of fiat money are infused into the economy at high rates of velocity, the likelihood of noticeably higher rates of inflation is made greater.
A number of other central banks followed a similar policy.
For example, between late February 2020, even days before the media started fixating on the virus thingy, and March of this year, the European Central Bank embarked on its own version of monetary expansion.
During that period, the ECB increased its holdings by over 5 trillion euros.
The Bank of Japan also increased its holdings.
Between February of 2020 and earlier this year, it had increased its holding by a few hundred trillion Yen.
For a number of years, including the Bank of Japan, major central banks have kept their interest rates low.
For its part, the Bank of Japan kept its interest rates at negative rates, meaning that depositors had to pay banks to hold their money.
During and before the pandemic, major corporations had increased the number of mergers and acquisitions, as those entities were able to make their purchases using inexpensive money and higher stock valuations.
The other part of the equation was that of supply.
As a result of lockdowns, many small and medium-sized businesses were closed.
Shipping ports had lost workers, and truck drivers going to those ports had to wait in long lines, as a result.
In effect, well before Russia’s invasion of Ukraine, shortages of various goods and services developed.
The invasion and sanctions imposed have aggravated shortages of commodities like petroleum and grain.
And there have been instances of price gouging.