Marketmind: Anarchy in the UK

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever

Farewell risk-on rally, we barely knew you. Even British prime ministers last longer.

Investors on Thursday initially shrugged off Liz Truss’s resignation and the latest episode of British political pantomime, and Wall Street opened firmly in the green. But it couldn’t defy gravity – or more specifically, soaring U.S. bond yields and rate expectations – for long.

Treasury yields rose again to new multi-year highs – the 10-year yield has risen 12 weeks in a row, and is up 20 basis points this week alone – while the Fed’s implied terminal rate hit 5.00% for the first time.

Incoming Q3 earnings reports would need to be block-rocking beats across the board to overcome monetary tightening on that scale, and unsurprisingly, they haven’t been.

For Asian markets, the focus on Friday yet again will be firmly on Japan. The dollar has sailed to a new 32-year high above the psychologically important 150.00 yen level, and at the time of writing, Japanese authorities are nowhere to be seen.

The Bank of Japan intervened in the bond market in the past 24 hours, an emergency bond-buying operation to get the 10-year yield back below the 0.25% cap. It just about managed it.

But there has been no direct action on the currency beyond another volley of verbal warning shots. Note that the Ministry of Finance gave the BOJ the green light to intervene selling almost $20 billion last month when dollar/yen was around 147.00.

Pressure on the yen and Japanese government bonds is mounting. If Japanese inflation figures on Friday come in hotter than expected, it will only intensify.

The FX market knows Japan is sitting on around $1.3 trillion of FX reserves, and is goading MOF/BOJ into spending some of it.

Key developments that could provide more direction to markets on Friday:

Japan consumer price inflation (September)

South Korea producer price inflation (September)

UK consumer confidence (October)

UK retail sales, mortgage loans, public finances (September)

Fed’s Williams speaks

(Reporting by Jamie McGeever in Orlando, Fla.; Editing by Josie Kao)