Home Market Analysis Stock markets come back to life, BoJ sacrifices the yen

Stock markets come back to life, BoJ sacrifices the yen

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Stocks set for steady gains despite lingering risks

Wall Street is making a comeback

Hopes of a peace deal in Ukraine and signals that China will turn on stimulus more broadly have helped global stock markets shake off the gloom this week, although many of the risks behind the recent rout remain. Between ongoing wars, soaring inflation, central bank rate hikes and the increased likelihood of a recession, investors have a lot to do this year. When so many narratives collide, it often leads to explosive market volatility. Fund managers are forced to do some defense by de-risking and deleveraging, waiting for the right opportunity to step back in. Some of them re-entered the market this week, lured by stock valuations reaching pre-pandemic levels and a sense that most of the “bad news” was already priced in.

The S&P 500 extended its upward momentum yesterday and is set for a weekly gain of around 4%, with the Nasdaq performing even more impressively. It’s hard to say if the market has bottomed, but the worst of the storm appears to be over.

The aggressive pace of central bank tightening has begun, valuations have recovered, and everyone is hedged. Everything but the kitchen sink has hit sentiment lately, and unless there’s an actual recession, it’s hard to see what will continue to drive this market lower.

Yen weakens, dollar retreats

In foreign exchange, the Japanese yen was the biggest victim of the week amid a double whammy of improving risk appetite and widening spreads between Japan and the rest of the world.

The Bank of Japan ended its meeting earlier today without signaling any policy change, happy to lag the rest of the world in exiting cheap currencies, even if it means sacrificing the yen. Until the Bank of Japan joins the global normalization party, it is hard to imagine a real trend reversal.

It’s also been a rough week for the dollar, despite the Fed’s best efforts to keep the currency stronger. Yield spreads actually widened in favor of the dollar, but improving risk sentiment overshadowed that, with hopes of a ceasefire in Ukraine instead boosting the ship.

Bank of England turns cautious, euro shines

Elsewhere, the Bank of England raised interest rates by 25 basis points yesterday, disappointing those looking for a bigger move. Policymakers were markedly cautious as they downplayed optimism about the economy and adjusted their forward guidance, opening the door for a possible pause in tightening. Sterling initially fell, but then recovered with a risk-on tone.

The big winners this week were the euro and the commodity-linked dollar. At this stage, the euro is completely at the mercy of the war headlines. While bets on peace have seen the euro recover recently, it may be time to pay next week as the latest business surveys will reveal the impact of the war on the economy and whether Europe is slipping into recession.

There’s not much left on the agenda for today. Phone calls between U.S. and Chinese leaders will be the focus, hoping Xi can use his good relationship with Moscow to help broker a peace deal.

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