Asia’s stock rally to record highs looked to take a breather on Wednesday as investors consider the impact of a jump in bond yields. The yen strengthened for a second day, with traders fixating on prospects for scaled-back debt purchases from the Bank of Japan.
Reduced asset purchases by the world’s top central banks, rising commodity prices and looming U.S. debt sales all support the case for higher bond yields, in a potential test to surging equity valuations. Yields on 10-year U.S. Treasuries held near the highest since March, around 2.55 percent, a level that spurred the fixed-income veteran Bill Gross to declare a bond bear market Tuesday. Oil is near its highest since 2014.
Asian equity benchmarks were mixed, with Japanese equities weighed down by another rise in the yen, after the Bank of Japan made a small cut to purchases of long-dated Japanese government bonds Tuesday. Futures on the S&P 500 Index were little changed after the gauge edged up to a fresh record in a sixth straight session of gains.
China’s central bank weakened its daily fixing on the yuan by the most since September, one day after a report showed it has adjusted its currency-fixing mechanism. Shares in Shanghai were little changed after a report showed factory price gains eased in China, potentially reducing the incentive for the People’s Bank of China to raise borrowing costs.
The start of 2018 has been greeted by a surge in risk assets, with strategists at Morgan Stanley saying the bull market in equities has now reached a stage of euphoria. The next leg of the rally will be tested by earnings reports due this week at companies including JPMorgan Chase & Co. and Wells Fargo & Co.
"Markets will be higher at the end of next year than they are right now, in my opinion, but it’s going to be a little volatile getting there," Jonathan Slone, chief executive officer of CLSA Ltd., said on Bloomberg TV. Greater fluctuations are in store "as this adjustment period comes in and as the bond markets settle down into what could be a new trading range," he said. – Bloomberg
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