A surprise shift in Japan's interest-rate policy is roiling markets Tuesday morning. The Bank of Japan has removed the 0.25% cap on rates, which allowed them to quickly rise to 0.4% and caused the yen to jump. There has been speculation that Japan might make this move next year, but the BOJ said it was a necessary move now to allow the government bond market to function more effectively..
This move is hitting bonds around the world. Higher yields strengthen the yen and will decrease demand for bonds such as the U.S 10-Year. Equities are mixed as this action will help the battle against inflation by slowing growth but may increase the likelihood of a recession.
With markets sharply lower over the last four days, this news is unlikely to have the negative impact that it would have had if it had hit a week ago. The market has been pricing in a variety of economic negatives, and the fact that Japan has now joined central banks around the world with a more hawkish policy may actually turn out to be more of a positive than a negative as it removes one area of uncertainty and advances the battle against inflation.
The primary issue for U.S. equities Tuesday morning is whether the ugly selloff over the last four days, combined with intense negative sentiment, is sufficient to help create some sort of oversold bounce. The problem is that the more that traders try to anticipate a bounce, the greater the danger they will be caught leaning the wrong way and be forced to sell when a bounce doesn't develop.
This move by Japan adds to the pressure that already exists for end-of-the-year allocations out of stocks and into bonds. That is moving the market more than anything else right now, but that pressure can end abruptly. There are also tax-loss selling considerations that are moving stocks without any consideration of their fundamentals.
Typically, large institutions make most of their big moves prior to the Christmas holiday, which then allows for a potential Santa Claus rally in the last week of the year. With the market under so much pressure already and some major macro moves taking place, the odds of a substantial bounce before the end comes to an end are increasing.
We have a mixed start Tuesday morning, with equities holding about even while bonds are under pressure.