U.S. stock futures see choppy trading after Bank of Japan signals policy shift

U.S. stock futures were volatile as Treasury yields rose after the after Bank of Japan delivered a surprise tweak to monetary policy.

How are stock-index futures trading
  • S&P 500 futures
    dipped 7 points, or 0.2%, to 3838

  • Dow Jones Industrial Average futures
    fell 23 points, or 0.1%, to 32950

  • Nasdaq 100 futures
    eased 36 points, or 0.3%, to 11158

On Monday, the Dow Jones Industrial Average
fell 163 points, or 0.49%, to 32758, the S&P 500
declined 35 points, or 0.9%, to 3818, and the Nasdaq Composite
dropped 159 points, or 1.49%, to 10546. The Nasdaq Composite is down 6.3% in just the previous four days, and has retreated 32.6% so far this year.

What’s driving markets

Wall Street was in danger of recording a fifth consecutive session of losses after markets were rattled by a surprise monetary policy shift by the Bank of Japan.

The S&P 500 closed the previous day near a six-week low amid concerns that central banks’ hiking of borrowing costs to combat inflation will push economies into recession and cause corporate earnings to fall.

The Bank of Japan had been a supportive outlier of late having maintained rates at the zero lower bound while others embarked on their biggest tightening cycle in a generation, noted Henry Allen, strategist at Deutsche Bank.

But on Tuesday the BoJ doubled the cap on the country’s 10-year bond, from 0.25% to 0.5%, causing the yen to jump more than 3% while whacking equities in the region and U.S. stock futures.

The BoJ kept its short term interest rate at minus 0.1%, but the raising of the yield at which it will allow bonds to trade was seen as a step towards the ending of its era of ultra-loose monetary policy. The Nikkei 225
fell 2.5%.

“It’s important not to underestimate the impact this could have, because tighter BoJ policy would remove one of the last global anchors that’s helped to keep borrowing costs at low levels more broadly,” Allen added.

The 10-year U.S. Treasury yield
rose7 basis points to 3.658% as the equivalent maturity Japanese government bond
jumped 14.6 basis points to 0.402%

“The rise in global yields suggests markets are now definitely putting thoughts of a dovish pivot later in 2023 on the back burner, with sovereign bond yields rising globally,” said Stephen Innes, managing partner at SPI Asset Management.

“Against this backdrop, investors are trying to find the central bank’s endgame, which is proving further bad news for equities, and with the BoJ raising the last low rate anchor, it’s not helping to calm year-end stormy seas,” Innes added.

However, some analysts observed that recent falls for U.S. stocks were starting to look overdone, and indeed S&P 500 futures pared losses later.

“U.S. equity markets remain trending lower in the short run, but are close to near-term support which should materialize between 12/21-12/23 at marginally lower levels,” wrote Mark Newton, head of technical strategy at Fundstrat, in a note to clients.

“The percentage of stocks above their 20-day moving average is nearing single digit territory, which normally provides relief for longs. Overall, I don’t expect markets to go down much further in December, and risk/reward for trading shorts looks sub-par with SPX not far above targets at 3725.”

“This might materialize at 3775-3800 before allowing for a minor bounce, and then retest into Wednesday-Friday. However, I’m fully expecting a bounce next week into year-end, regardless if it proves temporary,” Newton concluded.

U.S. economic updates set for release on Tuesday include November building permits and housing starts, due at 8:30 a.m. Eastern.

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