Weary Wall Street cheers improved consumer confidence

Global stock markets rose on Wednesday, as US consumer confidence rebounded in December, and the dollar regained stability after the Bank of Japan rocked markets with a surprise decision to loosen its grip on government bond yields.

The MSCI All-World index rose about 1.2 per cent on the day, although it is on track for a more than 3 per cent decline in December. This year, the index is set to have fallen for eight out of 12 months, on a par only with 2008 for the number of monthly losses in a calendar year on record.

Wall Street's main stock indexes also rallied on Wednesday, with the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite all up between 1.4 per cent and 1.6 per cent. They were boosted by The Conference Board's improving consumer confidence index, and stronger-than-expected earnings at sportswear giant Nike and delivery behemoth FedEx Corp.

In Europe, shares more than recovered the previous day's 0.4 per cent drop, helped in part by a rally in sportswear stocks.

On Tuesday, the Bank of Japan (BOJ) widened its trading band for 10-year government bond yields from 25 basis points (bps) either side of zero to 50 bps.

That pushed the yen to its biggest one-day gain against the US dollar in 24 years. The currency had fallen for most of the year because of Japan's low yields, as well as selling in the Japanese stock market and a sell-off for bonds around the world.

The dollar regained about 0.5 per cent against the yen in US trading on Wednesday.

The decision by the BOJ, the last dove of the major central banks, has added to concern among investors about how the impact of rising interest rates and persistent inflation will affect the global economy.

Fund managers are adopting an extremely cautious approach to the start of 2023 and, as such, trading conditions are thin and highly volatile.

“We think recessions are coming in the US and Europe, but it's very hard to gauge the amplitude of these recessions right now. This makes it very hard to evaluate earnings potential for 2023, and so it is also very hard to do the usual reasoning about valuations,” said Bastien Drut, chief thematic macro strategist at CPR, a unit of Amundi, Europe's largest asset manager.

“We’ve taken profits from the rally in November and our positioning in equities is rather low," he said.

In Europe, the STOXX 600 rose about 1.7 per cent, led by the retail sector, including Nike's German rivals Adidas and Puma. London's FTSE 100 also gained about 1.7 per cent.

The dollar, meanwhile, crept 0.2 per cent higher against a basket of major currencies, which in turn nudged the gold price off six-month highs, while crude oil bounced by nearly 3 per cent following data that showed a pickup in weekly demand.

Some of the major drivers of dollar gains - an ever-weaker yen, a struggling Chinese yuan and outsized rises in US yields - are starting to shift. The euro held steady at around 1.061, not far from last week's six-month high.

Carry trades

Bond markets were kept under pressure.

Many now expect some of those in overseas markets that relied on Japan's yields will have to shed some of those "carry" trades to make up for a rising yen.

Aussie bonds sold off heavily and Asian currencies, such as the Singapore dollar, also weakened.

"There appears to be growing caution about inadvertent 'risk-off' from unwinding 'carry' and knock-on impact in risk assets," analysts at Mizuho wrote.

Citi analysts said the calm in equity markets might not last, and thin, year-end trading could lead to volatility.

"Our equity traders caution that the most under-priced market risks are roughly how high the structural inflation floor will settle in a post-Covid world.

"We know the Fed is resolutely committed to seeing inflation taper down to 2 per cent and stay there, which suggests it may need to create a lot more pain than markets currently discount in order to reach its target," they said in a note.

Treasury yields were steady, with benchmark 10-year Treasury yields down 1.3 basis points to 3.671 per cent, as investors waited on inflation data due on Friday for further clues about whether price pressures are continuing to moderate. Japanese 10-year yields closed up 7 bps at 0.48 per cent, close to the BOJ's 0.5 per cent ceiling.

Oil prices rose by nearly 3 per cent on Wednesday after data suggested a larger-than-expected draw in US crude stockpiles, but gains were capped by growing concerns over demand in China and a snowstorm that is expected to hit US travel.

Gold prices were little changed on Wednesday, holding above the key $1,800 level, as expectations of slower US rate hikes lent support, but the rise in the dollar capped further gains.