Futures Soar, Yields And Oil Jump After BOJ Capitulation Nukes Yen, Restarts Carry Trade
The recent panic over the carry trade, which began a week ago when the Bank of Japan (BOJ) increased rates by a significant 0.15%, has subsided. This comes after the BOJ backtracked on its rate hiking cycle on Wednesday morning. BOJ deputy governor Shinichi Uchida signaled a dovish U-turn following historic financial market volatility by promising not to increase interest rates when the markets are unstable.
This announcement, the first public statement by a BOJ board member since the bank raised rates on July 31, caused the yen to weaken by over 2%, bond yields to rise, and stocks to soar. As of 7:30am ET, the S&P 500 had jumped by 1.2%, with both Tech and small-caps outperforming as the BOJ capitulation relief rally continues.
Premarket Movers
In the premarket, Mag7 are all higher and semis are shrugging off SMCI (-12%) catastrophic margin collapse as NVDA, AVGO, AMD, and QCOM lead the group higher each up 1%+. Super Micro Computer crashed 14% reversing a 20% earlier spike, as the computer hardware maker’s disappointing gross margins overshadowed an otherwise strong 2025 net sales forecast. Airbnb also tumbled 14% after the company gave a disappointing outlook for a third consecutive quarter and warned of slowing demand from US vacationers. Here are some other notable premarket movers:
Emergent BioSolutions slumps 34% after the company forecast 3Q revenue with a midpoint that fell short of analyst estimates.
Fortinet rises 16% after the cyber-security company posted a strong margin performance in the 2Q.
Lumen Technologies soars 24% after the company boosted its full-year free cash flow forecast.
Porch Group sinks 19% after the home-services software company reported 2Q results that missed expectations, with severe weather weighing.
Rivian drops 7% after the electric vehicle startup warned of a looming plant shutdown next year to prepare for a new vehicle launch.
Novo Nordisk A/S shares dropped as much as 5% after the Danish drugmaker cut its profit forecast for the year.
Shopify gains 17% after posting 2Q results that exceeded analysts’ estimates, suggesting that the Canadian e-commerce company is managing to navigate cautious consumer spending.
Trex falls 17% after the manufacturer of decking cut its year revenue forecast as 2Q sales fell short of estimates.
TripAdvisor tumbles 19% after the online travel company reported 2Q revenue that missed consensus estimates.
Upstart soars 25% after the AI lending marketplace firm gave a 3Q forecast that is stronger than expected.
Volatility is Waning
Volatility is waning as the S&P 500 recovers from its worst one-day drop since September 2022. The VIX plunged another 17% on Wednesday following its biggest plunge since 2010. The biggest event overnight was Uchida's surprising U-turn, and capitulation, which came less than a week after the BOJ's historic and unexpected rate hike which unleashed a carry trade unwind and pushed the VIX as high as 65, its biggest increase since the covid crash.
“I wouldn’t underestimate importance of what the Bank of Japan has been saying overnight,” Jennison Associates Managing Director Raj Shant said on Bloomberg TV. “I think that’s really helpful. This carry trade has been many, many years in the making, and probably indirectly affects a lot of asset classes around the world.”
Still, the recent market turmoil was a “stark reminder of how quickly things can change,” said Justin Onuekwusi, chief investment officer at St James Place. “While overall corporate balance sheets are healthy and recession risks are low, we are starting to see earnings tail off a bit and companies’ guidance is outlining a more uncertain future.”
European Stocks
European stocks follow US futures and Asian counterparts higher after the BOJ capitulation. The Stoxx 600 adds 1.1% with auto, construction and bank names leading gains. Novo Nordisk A/S shares dropped as much as 5% after the Danish drugmaker cut its profit forecast for the year. German lender Commerzbank AG, sportswear maker Puma SE and skin-care products maker Beiersdorf AG also slumped after earnings misses. On the other end, shares in Continental AG rose after the German manufacturer posted improving returns at its struggling car-parts unit, which it may spin off in its biggest-ever restructuring. Dutch lender ABN Amro Bank NV gained after the Dutch lender raised its outlook for lending income, showing how Europe’s high interest rates continue to provide tailwind for the banking industry. The banks sub-index outperformed the benchmark. Here are the biggest European movers:
Glencore shares climb 1.5%, reversing earlier losses. The company decided to retain its coal and carbon steel materials business after shareholder consultations, a move analysts welcome given its profitability.
Continental shares rise as much as 5.5% after the German automotive parts maker’s second-quarter results showed what Bernstein called some “rays of hope,” though this was dampened by the cut to the FY24 sales guidance.
Sampo rises as much as 2.5% following the insurance brokerage firm’s second-quarter earnings report. DNB Markets expects small upgrades to full-year consensus and notes the company’s positive growth momentum.
GEA Group shares rise as much as 4.4%, the most in five months, after the mechanical engineering firm reported earnings ahead of consensus in the latest quarter.
Sixt shares fall as much as 1.6%, fluctuating after the vehicle rental firm reported in-line earnings and warned full-year profits will be at the lower-end of its full year guidance.
Novo Nordisk shares drop as much as 7.7%, the most in two years, after the Danish drugmaker reported weaker-than-expected sales for its Wegovy blockbuster in the second quarter.
Beiersdorf shares drop as much as 5.9%, to the lowest intraday since November 2023, after the maker of personal-care products reported second-quarter results that missed estimates.
Puma shares drop as much as 14% after the sportswear brand reported second-quarter revenue in constant currency that missed consensus estimates and narrowed its full-year Ebit forecast.
Maersk shares fall as much as 4.5% after the marine shipping company’s second quarter Ebitda missed estimates. Morgan Stanley notes that the buyback is not being reinstated and says freight rates are starting to move lower.
Evotec slumps as much as 39%, to the lowest since November 2016, after the German pharmaceutical company announced material cuts to its full-year guidance and also postponed a planned capital markets day in October to evaluate its next strategic steps.
Asian Equities
Asian equities advanced for a second session following Monday’s global rout, after the Bank of Japan said it won’t raise interest rates if financial markets are unstable. The MSCI Asia Pacific Index climbed as much as 2.1%. Japan’s Topix index pared earlier gains to close 2.3% higher as Bank of Japan Deputy Governor Shinichi Uchida noted the recent volatility in the nation’s markets and said its rate path will shift if there’s an impact on the policy outlook. Benchmarks in South Korea and Taiwan also climbed, with the Taiex index logging its biggest single-day rally since May 2021. Technology stocks led gains across the region as concerns about further unwinding of the yen carry trade eased, with the Japanese currency weakening more than 2% against the dollar. Still, some market watchers remained cautious.
FX
The Bloomberg index rose for a second day while the yen is around 2% weaker against the dollar with the cross topping just short of 148.00. The weaker yen boosted higher-yielding currencies. The Mexican peso, a carry trade target that tumbled after the BOJ rate hike, rose more than 1% against the dollar Wednesday. The Swiss franc also underperforms with a 1.1% fall. The kiwi outperforms, rising 1% after the unemployment rate rose less than expected.
Rates
Treasuries are cheaper across the curve following the deeper selloff in core European rates after Bank of Japan Deputy Governor Shinichi Uchida pledged to refrain from hiking interest rates while markets are unstable. Treasury yields cheaper by 4bp-5bp with curve spreads little changed; 10-year around 3.94% with bunds underperforming by roughly 4.5bp in the sector. Supply is also a factor for Wednesday’s session, with 10-year note auction at 1pm New York time: the auction cycle continues with $42b 10-year new issue, following good result for Tuesday’s $58b 3-year note sale; it ends Thursday with $25b 30-year bond sale. The WI 10-year yield at ~3.93% is roughly 35bp richer than last month’s, which stopped through by 1bp.
Commodities
Oil prices advance, with WTI rising 0.8% to trade near $73.80 a barrel. Spot gold is steady around $2,393/oz. Bitcoin adds 1.7%.
Looking at today's calendar, US economic data slate includes June consumer credit at 3pm. Scheduled Fed speakers include Collins at 12pm.
Bottom Line
The recent events in the global financial markets have shown how quickly things can change. The Bank of Japan's decision to backtrack on its rate hiking cycle and pledge not to increase interest rates when markets are unstable has had a significant impact on global markets. However, it also serves as a stark reminder of the volatility and uncertainty that can exist in the financial world. It is important for investors to stay informed and make decisions based on a thorough understanding of the current market conditions. What are your thoughts on these recent developments? Share this article with your friends and sign up for the Daily Briefing which is everyday at 6pm.
