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The BOJ takes center stage, shorting Asia corporate bonds just got easier, and China’s war on risk. Here are some of the things people in markets are talking about.
Happy BOJ Day
All signs point to the Bank of Japan keeping monetary stimulus unchanged when its board meeting concludes in Tokyo Thursday, putting an end to the quietest year for policy since Governor Haruhiko Kuroda took the helm in 2013. The focus this meeting will thus turn to where the BOJ is headed in 2018, with great interest in the possibility of policy change, and whether Kuroda drops any hints about the likelihood of him staying on as governor after his current term ends in April. It won’t just be what Kuroda says that will be parsed by investors, but the general tone of his remarks as well. Market participants will be looking for signs of improvement in the inflationary environment and how far away the BOJ sees its 2 percent price target. While a majority of economists forecast the BOJ will maintain the status quo through the next year, talk of policy change is increasing among observers. Any further comments by Kuroda on the "reversal rate" theory will receive intense scrutiny.
Asian companies are turning to the dollar bond market like never before, selling record amounts of securities that leveraged investors desperate for yield are scooping up. But there’s a flip side to all that growth: it’s getting easier for funds to sell them short. Booming issuance and more buying by banks is increasing the supply of securities available for lending -- and therefore shorting, threatening to shake up what’s been a notably stable market. With unprecedented numbers of first-time borrowers and concerns about the financial transparency of some issuers, the market is increasingly vulnerable to higher volatility, according to strategists.
Bond Selloff Continues
The Treasury selloff continued unabated Wednesday, with losses led again by the long-end of the curve, mirroring price action from Monday and Tuesday amid robust trading. In a few swift moves this week, 10-year Treasury yields broke through key levels to the highest since March, while the yield curve, which had been relentlessly flattening, steepened the most since September 2016 and market-implied inflation rates reached an eight-month high. The pain isn’t just isolated to the U.S. In Europe, core bond yields continue to follow Treasury rates higher. Elsewhere in markets, U.S. stocks fluctuated near record highs, while tech shares led the Stoxx Europe 600 Index to its biggest decline in almost three weeks. Oil climbed above $58 after a report of a drop in U.S. crude stockpiles, while gold edged higher.
China’s War on Risk
China’s top leaders are taking a hard line when it comes to a number of risks, including pollution, poverty and those within the financial system. Economic policy makers led by President Xi Jinping agreed to "fight the battle of preventing and resolving major risks, with a focus on preventing and controlling financial risks," according to a statement following the annual Central Economic Work Conference in Beijing. In the coming three years, China will seek to keep a handle on financial risks and encourage a "virtuous circle" between finance and the real economy, they said. The reiteration of 2017’s stance can be taken as a signal that policy makers will continue to balance the goals of reining in the nation’s rampant credit growth and polluting industries with the desire not to let economic growth slow too drastically. Policy makers also agreed to move faster to put in place a housing system that ensures supply through multiple sources and encourages both purchases and rentals in 2018.
In addition to the BOJ, the central banks of Taiwan and the Czech Republic are also expected to keep interest rates unchanged Thursday as the trio hold the final monetary policy meetings of 2017 for major economies. Data due in the Asian day includes initial December South Korean trade, Thailand's November exports and imports, and Hong Kong CPI. As the world turns, Catalonia holds regional elections, while Europe's data highlights include Dutch unemployment, Danish consumer sentiment and retail sales, Swiss trade figures and French manufacturing confidence, before the U.S. reports on final 3Q GDP.
What we’ve been reading
This is what caught our eye over the last 24 hours.
- Bitcoin, bubbles and tech: Google's top finance searches of 2017.
- This crypto founder sold all of his coins after a massive rally.
- Forget bitcoin, China is all about AI stocks.
- Looking for the biggest housing bubble? It might be Norwegian.
- Everything you need to know in global markets.
- Don’t call the end of the rally in Emerging Markets quite yet.
- Coinbase is looking at insider trading.
— With assistance by Garfield Clinton Reynolds