Stocks return to declines, "hawkish" Bank of Japan

The US stock market performed slightly worse than the European stock exchanges yesterday. All major indices had a negative session yesterday. The market fears a recession and the sell-off initiated by the central banks last week is underway.

Strongly "hawkish" position of the Fed and EBC and the knowledge that high rates will remain for a long time, the autumn rebound is slowly shrinking and less and less of it remains. This morning, the Bank of Japan sent a hawkish signal. The negative sentiment was not corrected by a slight rebound of the Ifo index.

Moods may deteriorate

Most US indices failed to push through key technical levels last week, bringing us back into the long-term downtrend that has been going on since the beginning of this year. In fact, investors haven't had much positive news since recent central bank decisions. Weak data on US retail sales and PMI last week fueled market fears of a possible recession.

Following hawkish comments from Federal Reserve Chairman Jerome Powell at a press conference FOMC on Wednesday, New York Fed chairman John Williams, San Francisco chairman Mary Daly and Cleveland representative Loretta Mester in separate appearances on Friday said the Fed may raise rates for longer. Investors are waiting for the release of the PCE deflator this Friday. If the indicator does not show the expected decline, then the sentiment may deteriorate even further.

Decision of the Bank of Japan

Dax gained 0,36 percent yesterday. although this morning the contract for German index breaks local tech support and dynamically heads south. This means that the triple low pattern turned out to be an effective predictor of bearish sentiment. Yesterday's better Ifo reading did not help much. The main indicator rose in December for the third month in a row from 86,4 points. up to 88,6 points Both the expectations for the coming months and the assessment of the current business situation improved. Sentiment improved in almost all sectors. The only exception is construction, where the assessment of the situation has deteriorated further.

This morning, however, it is clear that it is not enough to improve the market sentiment. It is true that Ifo is still at a level previously only reached in the period leading up to or during a recession. The rebound of the index only shows that a major economic downturn is unlikely to materialize. The fact that gas rationing has become less likely than it seemed in the summer, given the relatively positive developments in gas supplies, has certainly contributed to the improvement of sentiment. However, there could be complications here if gas stocks continue to fall, as they did last week due to low temperatures.

In the morning, futures on stock indices began to lose heavily. Everything is due to the decision Bank of Japanwhich indeed left interest rates unchanged but decided to change the method of controlling bond yields. The fluctuation band for 10-year Treasuries has been extended to +/- 0,5%. (previously it was 0,25 percent). This decision is seen as comparable to a 25 basis point rate hike. The yen is definitely gaining in value. currency pair USD / JPY falls below 133,00.

Source: Łukasz Zembik, OANDA TMS Brokers