Business Maverick

Business Maverick

Yen surge hits Japanese shares, Korea rises on AI: markets wrap

Yen surge hits Japanese shares, Korea rises on AI: markets wrap
Advertisement of cryptocurrencies in Hong Kong, China, on Tuesday, Oct. 24, 2023.

Japan’s currency advanced and shares fell as traders ratcheted up bets that the Bank of Japan is nearing the end of its negative interest rate policy.

The yen surged as much as 1.1% in thin liquidity before paring its rise, and the advance sent the nation’s stocks and bonds lower. Shares in Korea and Taiwan gained after the Nasdaq 100 index rallied amid renewed optimism on artificial intelligence, while gauges in mainland China rose and Hong Kong’s declined.

“The exchange rate fluctuations have been quite dramatic, so it’s inevitable that Japanese stocks fall because of the yen appreciation,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. “Since a strong yen is not a bad thing for all Japanese companies, the decline in stocks is likely to be limited to a certain extent.”

Traders will be on watch for any clarification from Governor Kazuo Ueda of comments he made to lawmakers that his job was going to get more challenging from the year-end, helping fuel speculation the BOJ will start lifting its sub-zero benchmark rate soon. That helped push the yen to its strongest level since August as bets against the currency capitulated.

Japan’s economy shrank more than expected in the third quarter, suggesting the recovery is more fragile than thought and may give the BOJ reason to delay normalising policy.  

Krishna Guha at Evercore says he’s not “buying the idea” that the BOJ will seriously consider a surprise hike in December, with a move early in the new year more plausible. “While it is asserting a serious option to go in January, it is actually leaning more to a later hike in April,” he noted, adding that “while the direction of travel is right,” Thursday’s tactical trades have likely overshot. 

Read More: Two-Thirds of BOJ Watchers Expect End of Negative Rate by April

Elsewhere in Asia, shares in Hong Kong declined as traders took profit on the year’s top performers while the benchmark tested technical support. Meantime, chip makers in Taiwan and Korea surged after the Nasdaq 100 jumped 1.5%, fuelled by Alphabet Inc.’s 5.3% rally after Google released Gemini, the “largest and most-capable AI model” it has ever built.

“Artificial intelligence has potential to drive productivity gains sharply higher in 2024 and beyond,” said Yung-Yu Ma at BMO Wealth Management. “Resilience, adaptability and innovation have been hallmarks of the economy in 2023, and we see those factors carrying us through in 2024 as well.”

Investors now await the Indian central bank’s policy decision. It is expected to maintain its hawkish policy stance as strong economic growth and a state election victory for Prime Minister Narendra Modi gives policymakers little reason to consider interest rate cuts just yet.

Cooling labour market

Attention will soon shift to Friday’s US non-farm payrolls report as traders look for more evidence of a cooling labour market to assess the outcome of next week’s Federal Reserve policy meeting and solidify rate cut bets next year. Data this week showed continuing applications for jobless benefits fell by the most since July, though remained near a two-year high amid growing evidence of a cooling labour market. 

“The jobs report is likely to provide additional indications of the labour market softening, a welcome sign for employers,” Jose Torres, a senior economist at Interactive Brokers, said. “Its impact on markets, however, will depend on whether investors view the data as a stepping stone to a March rate cut and soft landing, or an adverse effect on consumer spending and a sharper economic slowdown.”

Traders are bracing for wild market swings over the next week as key US jobs and inflation data as well as the Fed’s December policy meeting come into view. A gauge of implied currency volatility over the next week in Asia jumped to its highest since March, according to data compiled by Bloomberg.

Marko Kolanovic at JPMorgan Chase & Co. warned clients that equities and other risk assets won’t be able to sustain any potential rallies without substantial rate cuts by central banks — and he doesn’t anticipate that unless markets drop severely or the economy stalls. For that reason, he said investors should opt for cash or bonds over stocks.

“This is a Catch-22 situation,” Kolanovic said. “This would imply that we would need to first see some market declines and volatility during 2024 before easing of monetary conditions and a more sustainable rally.”

In other markets, oil rose to pare the week’s losses, with low-conviction trading and mounting concerns about excess supplies leaving algorithmic traders calling the shots. Gold was steady ahead of the jobs report

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