GLOBAL MARKETS-Yen spikes after Japan intervention, stocks slump

(comment added, new prices)


Japan intervenes after dollar/yen breaks 145


Central bank bonanza as UK, Switzerland and Norway hike


Stocks plummet on Wall Street in Europe and Asia


Bond yields rise after Fed rate hike

By Herbert Lash and Marc Jones

NEW YORK/LONDON, Sept 22 (Reuters) – The yen edged higher on Thursday after the Federal Reserve’s unyielding interest rate policy the day before messed up the outlook for bonds and equities and forced Japan to unilaterally intervene in currency markets to bolster its currency for the first time since 1998.

The dollar slipped after previously climbing to fresh two-decade highs after the Fed hiked interest rates by a whopping 75 basis points on Wednesday. His forecast of more big increases in the future cemented the view that rates were “higher for longer”.

The bond market responded with the part of the yield curve measuring the gap between 2- and 10-year Treasury bills inverting the most since at least 2000. The metric, a signal of a likely recession in a year or two, later eased slightly to -43.4 basis points.

Stocks fell further on Wall Street and in Europe, where Russia’s threat to use nuclear weapons on Wednesday added to existing economic pain and volatility from the Ukraine war. The major UK, German and French bourses fell more than 1%.

But the big news of the day was that Tokyo supported the yen shortly after Europe opened up. While such a move had seemed imminent for weeks – the yen is down 20% this year, nearly half of that in the past six weeks – it has nonetheless dealt a blow.

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The Japanese currency is up nearly 4% from 145.81 to 140.31 against the dollar in just over 40 minutes. The yen was last up 1.21% against the dollar to 142.27.

Rate hikes by central banks around the world and Japan balking at the weak yen cooled the dollar’s recent rise to new highs, said Joe Manimbo, US senior market analyst at Convera.

“But the Fed’s steadfast determination to bring inflation back to 2% is likely to provide good support for the dollar for the foreseeable future,” Manimbo added.

As the dollar faltered, the euro rose 0.06% to $0.9844, with other currencies also gaining.

Tokyo’s move came just hours after the Bank of Japan kept interest rates ultra-low to fight a global wave of monetary tightening by the US and other central banks trying to stem roaring inflation.

Volatility and uncertainty have increased as the market grapples with a political regime that is now reducing liquidity after a decade of plenty, said David Bahnsen, chief investment officer at wealth manager The Bahnsen Group in Newport Beach, California.

“The excessive quantitative easing over the last decade will lead to excessive tightening and the market has no way to properly price in what this means for valuations,” Bahnsen said.

On Wall Street, the Dow Jones Industrial Average fell 0.3%, the S&P 500 fell 0.78% and the interest-rate sensitive Nasdaq Composite fell 1.47%.

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The likelihood of a recession if the Fed maintains its rate-hiking stance suggests earnings will fall 15% next year, said Mike Mullaney, director of global markets at Boston Partners.

“We’re going to revisit the (June) lows,” Mullaney said of the S&P 500. “The number being tossed around by the bears is 3200. Under a recession scenario that’s definitely in play.”

In Europe, the pan-regional STOXX 600 index fell 1.79% to close below 400 for the first time since January 2021. The MSCI indicator of global equity performance fell 0.98%, breaking this year’s low and hitting lows last seen in March November 2020 were recorded.

MSCI’s Emerging Markets Index fell 1.01% and Asian stocks tumbled to a two-year low overnight after the Fed’s rate hike and outlook.

The median of Fed officials’ own forecasts sees US rates at 4.4% by the end of the year — 100 basis points higher than their June forecast — and even higher at 4.6% by the end of 2023.

Futures struggled to catch up. The two-year Treasury yield in Asia hit a 15-year high at 4.135% and was last seen at 4.120%. 10-year yields made new 11-year highs and were last up 17.6 basis points to 3.688%.

In Europe, Germany’s interest-rate sensitive 2-year bond yield rose to 1.897%, its highest since May 2011, before declining to 1.851%.

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The Swiss National Bank also raised interest rates by 75 basis points, only the second increase in 15 years. The move ended a seven-and-a-half-year streak of negative interest rates.

Also in Europe, Norway and the UK hiked rates by 50 basis points, with traders seeing much more to come.

The pound’s modest gain on the day came after it hit a 37-year low of $1.1213 overnight on mounting worries about Britain’s financial health. The Swedish krona had also hit a record low earlier this week, despite the country’s steepest rate hike in a generation.

The global economic outlook is helping to push the dollar higher as US yields look attractive and investors think other economies look too vulnerable to keep interest rates as high as the Fed is considering will.

Japan and China are the outliers and their currencies are declining particularly badly.

The rise in the dollar has also rattled emerging market currencies, penalizing cryptocurrencies and commodities.

Lira traders winced again as Turkey, where inflation is now hovering around 85%, defied economic orthodoxy and cut another 100 basis points from its interest rates.

US crude was up 0.87% at $83.66 a barrel and Brent was at $90.62, up 0.88% on the day.

Spot gold fell 0.1% to $1,672.30 an ounce. Bitcoin surged 2.79% to $18,982.00.

(Reporting by Herbert Lash, Additional reporting by Marc Jones in London, Tom Westbrook in Sydney; Editing by David Evans and Kirsten Donovan)

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