Stocks buoyed by cheery data after BOJ damp squib

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LONDON (Reuters) – World stocks rose and the Japanese yen slid on Wednesday after the Bank of Japan poured cold water on expectations it could move away from its ultra-loose stance, while economic and earnings data proved cheery for European markets.

Data showed British inflation dropped to a three-month low of 10.5% in December, the latest sign that global inflationary pressures are abating.

Also helped by a string of positive earnings updates, Europe’s STOXX 600 index rose 0.4% to its highest level since April 2022.

Three factors have propelled stock markets higher, said Andreas Bruckner, European equity strategist at BofA Global Research: an expectation for a dovish pivot from the U.S. Federal Reserve, economic data that showed companies working overtime to deal with order backlogs, and China’s economy re-opening faster than expected from COVID-19 lockdowns.

“But the sugar high that markets are on will eventually disappear because it will be impossible to mask an underlying weakness in economic demand,” Bruckner said.

London’s internationally-focused FTSE 100 scaled a 4-1/2-year high, trading just short of its all time peak, after the latest UK inflation numbers, although worries over tight monetary policy remained as the rate hovered in double-digit territory.

Earlier in the day MSCI’s broadest index of Asia-Pacific shares outside of Japan rose 0.24%, and S&P 500 futures gained 0.26%.

JAPAN

The spotlight was also on Japan, where the yen slid and government bond yields retreated sharply from the central bank’s 0.5% ceiling after policymakers decided to keep yield curve controls in place.

The 10-year yield plunged as much as 14 basis points to 0.36% at its lowest point, which would have been the biggest one-day decline since September 2003, before edging back up to 0.41%. The yield was at 0.51% prior to the Bank of Japan decision.

The dollar at one point rose as much as 2.7% against the Japanese yen, but was last 0.78% higher at 129.11.

The BOJ should remain a focus in the coming months with eyes on who will replace its incumbent Governor Haruhiko Kuroda, said Ben Jones, director of macro research at Invesco EMEA.

“Over the medium term, there’s more room for the yen to run higher after today,” Jones said.

Compared to the series of rate hikes made by the U.S. Federal Reserve in its efforts to tame inflation, the BOJ could just be getting started, he said.

“Japanese investors have begun to repatriate money, moving out of U.S. equities and credit and returning it to home markets,” Jones said.

The dollar index, which measures the safe-haven currency against six peers, shed 0.26%. It has been undermined lately by falling U.S. bond yields as markets wager the Federal Reserve can be less aggressive in hiking rates.

The pound rose over 0.6% and the euro gained 0.4%, as the improved risk sentiment induced by the Bank of Japan rippled across currency markets.

COMMODITY RALLY

Oil prices rose extending the previous session’s gains, driven by optimism that the lifting of China’s strict COVID-19 curbs will lead to a recovery in fuel demand in the world’s top oil importer.

Brent crude futures jumped 1.5%, to $87.23 a barrel, following a 1.7% rally in the previous session.

In less than three weeks of 2023, foreign buying of Chinese stocks has exceeded last year’s total as investors bet on the country’s rapid recovery after COVID-19 lockdowns were lifted.

China’s Vice Premier Liu He said he welcomed foreign investment and declared his country open to the world after three years of pandemic isolation.

Data on Tuesday showed China’s economic growth had slumped in 2022 to 3.0% – the weakest rate in nearly half a century.

Spot gold rose over 0.5% to $1,918 per ounce., while three-month copper on the London Metal Exchange was up 0.9% at $9,367.50 a tonne, a seven-month high.