It looks like the week won’t be as dull as expected on financial markets. Investors were expecting to let the sessions fly by until Christmas, while listening to Mariah Carey or Perry Como. But it looks like the mood will be a little more electric. The BoJ monetary policy shift looks like a major reversal, since the central bank is so passive in normal times.

But let's start with equities, whose paths yesterday were divergent to say the least. In Europe, the major indices ended three consecutive sessions down with a modest rebound. The bare minimum in Switzerland, for example (+0.03%), and barely more in Germany, France and the UK (0.3 to 0.4% gains). That's meager and lacked a tad of conviction. And fortunately, energy pulled the convoy, otherwise red would probably have taken over from green. In the US, the question of the color of the indices was quickly decided. If the start of the session seemed hesitant, sellers quickly prevailed to drive indexes sharply lower. So they didn't close at the day's low, but they clearly suffered. The Dow Jones only lost 0.5%, helped by its defensive stocks (health care, energy, arms), but the S&P500 dropped 0.9% and the Nasdaq 100 a little over 1.4%. Cathie Wood's Ark Innovation fund, an archetype of extreme risk-taking on growth stocks, hit its lowest close since summer 2017. It has lost 66% since January 1.

Wall Street is struggling to recover from the bad news received from Western central bankers last week. The period of high rates will be longer than the market anticipated. At the same time, China is struggling as the end of the zero-covid policy is fueling new contaminations in the country.

And now, we have to add the Bank of Japan’s latest policy change. It was the last major central bank to have a very accommodating policy, because it initially welcomed some inflation after years of stagflation. While Japanese policy remains very flexible, with rates being kept extremely low, the BoJ has now decided to widen the range of fluctuation tolerated on 10-year government bonds. Clearly, it is paving the way for a normalization of its monetary policy, although it says this is to improve the functioning of the bond market and not because of inflationary fears. Governor Kuroda was even careful to clarify that this is not a disguised rate hike. Professionals were expecting this, but rather in six months. The market's response was a sharp rise in JGB yields (the Japanese 10-year), a drop in the Nikkei 225 (except for banks and insurance companies, which soared) and a sharp rise in the yen (+3% against the dollar).

As for the reaction in the United States, it can be seen in bond yields, which have risen sharply (the US 10-year went from 3.5% yesterday morning to 3.67% currently). The leading indicators of the Western equity markets have deepened their losses. I imagine that investors are reasoning that if the rather placid BoJ is acting in a hurry, it is because of a higher-than-expected degree of tension on rates. This is in line with recent fears stemming from the latest comments from the Fed and the ECB. "The Bank of Japan is once again teaching us that complacency is the devil," summarizes City Index analyst Matthew Simpson.

In other news, the EU is finally capping gas prices at EUR 180 per MW. The current price is EUR 110, while the previously discussed cap was EUR 275. Experts are divided on the effectiveness of such a measure, particularly because it risks reinforcing trading on the over-the-counter market, which is less transparent than traditional exchanges.

 

Economic highlights of the day:

Quiet day on the macro agenda, with mainly the November building permits & housing starts in the US. All the macro news here. 

The dollar remains near EUR 0.9420 and GBP 0.8240. Gold is trading around 1807 dollars. Oil is little changed, with North Sea Brent crude at USD 80.09 per barrel and U.S. light crude WTI at USD 75.83. US 10-year debt yield explodes higher to 3.69%. Bitcoin is trading around 16,800 dollars.

 

In corporate news:

* Nike gained 0.4% in premarket trading ahead of its quarterly earnings announcement after the close on Wall Street, with analysts expecting the sports equipment maker's sales to jump.

* KKR - The U.S. private equity firm announced on Tuesday that it would buy Japanese drugmaker Bushu Pharmaceuticals, owned by Hong Kong-based BPEA EQT, for an undisclosed amount.

* Meta Platforms - Facebook's parent company doesn't plan to complete its acquisition of Within Unlimited, the publisher of the "Supernatural" sports app, until Jan. 31, a California court opinion showed Tuesday.

* Lucid Group - The electric vehicle maker jumps 6% in pre-market trading after a successful $1.5 billion fundraising.

 

Analyst recommendations:

  • Aerojet: J.P. Morgan downgrades to neutral from overweight. PT down 4.3% to $58.
  • Allegiant Travel: Deutsche Bank downgrades to hold from buy. PT up 12% to $75.
  • Apple: JP Morgan retains his positive opinion on the stock with a Buy rating. The target price is revised downwards from USD 200 to USD 190.
  • Capri Holdings: Raymond James initiated coverage with a recommendation of outperform. PT set to $65.
  • Ciena: J.P. Morgan upgrades to overweight from neutral. PT up 24% to $60.
  • Cigna: Nephron Research downgrades to hold from buy. PT up 14% to $378.
  • Derwent London: Berenberg remains "Hold" with a price target reduced from GBp 2800 to GBp 2450.
  • Lowe's: Credit Suisse reinstated coverage with a recommendation of neutral. PT up 3.4% to $210.
  • NetApp: J.P. Morgan downgrades to neutral from overweight.PT up 20% to $71.
  • Nike: JP Morgan is keeping its Buy rating. The target price has been lifted and is now set at USD 127 compared to USD 120 before.
  • Owens: J.P. Morgan downgrades to underweight from neutral. PT down 9.9% to $79.
  • Spirit Air: Deutsche Bank downgrades to hold from buy. PT up 25% to $24.
  • Tesla: Fubon Securities downgrades to neutral from buy. PT up 13% o $170.
  • Tractor Supply: Credit Suisse reinstated coverage with a recommendation of outperform. PT up 23% from last price to $260.
  • Whirlpool: J.P. Morgan downgrades to neutral from overweight. PT down 1.8% to $137.
  • Yelp: J.P. Morgan downgrades to underweight from neutral. PT down 14% to $23.
  • Ziff Davis: J.P. Morgan downgrades to neutral from overweight. PT up 7.7% to $85.