By Geoffrey Smith
Investing.com — The Bank of Japan moves to tighten policy ever so slightly – and the yen goes wild. The European Union finally agrees on a mechanism to cap natural gas prices, raising doubts about its ability to attract enough gas next year. U.S. stocks are mixed, unable to shake off the monetary tightening/looming recession blues, likely to be reinforced by more housing market data later on. Oil is also drifting ahead of U.S. inventory data. Nike and FedEx report earnings after the bell. Here’s what you need to know in financial markets on Tuesday, December 20th.
1. OMG – It’s alive!
The yen shot higher as the Bank of Japan took a tentative step toward tightening monetary policy for the first time in years.
With inflation now over 3.5%, the BOJ decided to loosen its control of 10-year government bond yields, allowing them to rise as high as 0.5%. Previously, it had capped yields at 0.25%.
The yen rose 3.3% against the dollar – a massive move by its standards – to trade at a four-month high. That also took the dollar index 0.7% lower to 103.69, testing a six-month low.
The BOJ has been the only major developed market central bank not to raise interest rates this year, preoccupied with a 30-year fight against deflation that started after its property bubble exploded in the 1990s. The rock-bottom interest rates available in Japan have made the yen the funding currency of choice for all those engaged in ‘carry trades’, and the unwinding of such trades is likely to put upward pressure on bond yields and downward pressure on other risk assets across the globe.
2. EU finally agrees on gas price cap
European Union energy ministers finally agreed on a mechanism for capping wholesale gas prices, a measure that could blunt inflation over the next year but risks leaving the continent short of gas when the time comes to refill its storage facilities in the spring and summer.
The cap finally agreed upon was €180 a megawatt-hour, to be activated if the benchmark TTF contract in the Netherlands trades above that level for more than three days, and is more than €35 above reference prices for liquefied natural gas.
TTF futures fell to their lowest in six weeks on Tuesday to test the €100 level, before rebounding to trade at €104.00/MWh by 06:00 ET (11:00 GMT). The contract for June, when injection into storage will be in full swing, followed suit, falling 2.6%.
In the absence of peace in Ukraine, the EU will have to buy much more gas from alternative suppliers next year, having enjoyed nearly normal supplies from Russia for half of 2022.
3. Stocks set to open mixed, FedEx, Nike reports eyed
U.S. stock markets are set to open mixed later, with the Bank of Japan’s tightening indirectly putting pressure on any trades funded with borrowed money.
By 06:20 ET, Dow Jones futures were up 49 points, or 0.2%, while S&P 500 futures were up 0.1%, and Nasdaq 100 futures were down 0.1%. The three main cash indices had their lowest close since early November on Monday, spooked by the thought of higher interest rates and lower corporate earnings next year.
Stocks likely to be in focus later include Honeywell (NASDAQ:HON), which edged up in premarket trade after it agreed to pay $203 million to settle U.S. and Brazilian bribery charges, and H&M ADRs (OTC:HNNMY), after Justin Bieber told fans to boycott the ‘trash’ merchandise that he said it had produced without his consent.
FactSet (NYSE:FDS) heads a thin list of earnings in the morning, while Nike (NYSE:NKE) and FedEx (NYSE:FDX) report after the closing bell.
4. Housing market slumping from a high level
November data for housing starts and building permits will continue this week’s theme of updates from the real estate sector, which started in miserable fashion on Monday with the National Association of Homebuilders’ monthly survey.
The NAHB’s market index fell to 31, which aside from the early pandemic slump represents its lowest in over a decade. By contrast, actual building activity is still going on at a historically high level, albeit the industry feels like it’s in recession because of how sharply things have slowed down this year. Last month’s figure of 1.425 million starts was still higher than at any time between the subprime boom and the boom triggered by the pandemic.
Over in Europe, the only economic data of note also pointed to a cooling of inflationary pressures, as German producer prices fell 3.9% on the month in November due to an unwinding spike in energy costs.
5. Crude drifts ahead of inventory data while Putin ponders
Crude oil prices drifted ahead of U.S. inventory data later from the American Petroleum Institute. The market is struggling for direction, amid uncertainty over supply-side responses to a weakening of near-term demand from the world economy.
Final demand in the U.S. appears to be slowing sharply, but the Biden administration is now back on the buy side, refilling a Strategic Petroleum Reserve that it depleted in order to take the edge off the summer surge in gasoline prices.
At the same time, the Russian government is still working on a final response to the G7 price cap mechanism that has depressed its revenues. While President Vladimir Putin has threatened to cut supplies if necessary, unilateral action risks upsetting OPEC, with whom it has coordinated output for the last few years.