Japanese government bond yields remained near their highest levels in decades, Tuesday, despite strong demand at a 40-year bond auction, at a time when inflation fears, rising oil prices and rising US bond yields increased pressure on Japanese financial markets, and pushed the Nikkei stock index to decline for the second session in a row.
The yield on Japanese benchmark 10-year government bonds rose 0.5 basis points to 3.09 percent, remaining close to the 30-year high of 3.115 percent, which was recorded last week.
This came in conjunction with continued pressure on global bond markets, after US Treasury bond yields rose to their highest levels in several years, amid fears that rising oil prices would lead to increased inflation, in addition to expectations of further interest rate increases by the Federal Reserve.
In Japan, bets are increasing that the Bank of Japan will raise interest rates again before the end of the year. This adds pressure on bond prices, especially with continued concerns about inflation and potential fiscal expansion.
The Japanese Ministry of Finance sold 40-year government bonds worth about 300 billion yen ($1.91 billion), in an auction that showed strong demand. The bid coverage ratio rose to 3.1 times, compared to 2.82 times in the previous auction in July, recording the highest level since July 2020.
Takayuki Miyajima, chief economist at Sony Financial Group, said that yields close to record levels on 40-year bonds were likely to attract demand from insurance companies and foreign investors. But he pointed out that speculation about additional interest increases, the rise in their expected final level, and fears of financial expansion are still factors pressuring the market.
The 20-year bond yield stabilized at 3.915 percent, the 30-year bond yield at 4.17 percent, while the 40-year bond yield fell 0.5 basis points to 4.22 percent. The two-year bond yield, which is most sensitive to the Bank of Japan's movements, fell one basis point to 1.955 percent, moving away from the highest level in 31 years that it recorded in the previous session.
This atmosphere was reflected in the stock market, as the Nikkei 225 index closed down 0.6 percent at 65,481.27 points, while the broader Topix index fell 1.72 percent to 4,041.13 points.
Wataru Akiyama, equity strategist at Nomura Securities, said that inflation fears and the resulting rise in interest rates are putting pressure on the stock market, pointing to the growing belief that artificial intelligence stocks, which were among the main drivers of the Japanese market, have become relatively highly valued in the current interest environment.
The scope of losses within Nikkei expanded; The shares of only 36 companies rose compared to 188 shares that declined. “Nexon” shares fell 14.42 percent, “Mitsubishi Motors” shares fell 4.93 percent, and “Idemitsu Kosan” shares fell 4.92 percent. On the other hand, “Tokai Carbon” rose 4.75 percent to a record close, “Disco” rose 4.19 percent, and “Screen Holdings” rose 4.08 percent.
Tuesday's movements indicate that Japanese markets are facing a combination of pressures represented by the high cost of borrowing, the rise in energy prices, and the increasing possibility of tightening monetary policy, which are factors that may continue to influence the trends of stocks and bonds during the coming period.
Chinese stocks held firm on Tuesday, supported by government pledges to intensify anti-cyclical policies and stabilize the real estate market, while the yuan rose against the dollar as exporting companies increased the conversion of their revenues into the US currency before the week-long National Day holiday.
The CSI300 index of leading stocks remained almost stable by the mid-session break, while the Shanghai Composite Index rose 0.1 percent. In Hong Kong, the Hang Seng Index fell 0.6 percent, with shares of major technology companies listed in the city falling by about 1.4 percent.
The main support for Chinese stocks came from the real estate sector, after the State Council pledged to take measures to stabilize the market, which represents one of the most prominent sources of pressure on the second largest economy in the world. “Funky” shares jumped by about 8 percent, amid hopes for additional steps to support demand for housing.
Analysts at Goldman Sachs said they expect the use of housing savings funds to expand, which will help reduce average interest rates on mortgages to a limited extent, in addition to the tendency of more major cities to adopt local measures to ease restrictions imposed on the housing market.
Shares of companies related to artificial intelligence witnessed a limited improvement in sentiment, as the fifth generation communications index rose 0.8 percent, while the “STAR50” index, which includes technology companies, rose 0.6 percent. In Hong Kong, the index of innovative pharmaceutical companies jumped 3.3 percent.
But the rise in US Treasury yields and the lack of liquidity ahead of the holiday limited investors' appetite. Analysts at Northeast Securities said that the previous sharp declines quickly absorbed a large part of the negative sentiment, which made the valuations of some high-quality assets more attractive.
The Chinese National Day holiday begins on Thursday, and local markets will resume trading on October 8, which has led to a decline in trading volumes and investors being reluctant to build large positions before the extended closure.
In the currency market, the yuan rose as exporters increased their dollar holdings into the local currency before the holiday, overcoming pressures resulting from the strength of the dollar, which remained close to its highest levels in two months.
The yuan recorded 6.7057 per dollar in immediate trading, up 61 points from the close of the previous session, after opening at 6.7094. The yuan traded outside the mainland also rose by about 0.09 percent, while the dollar index stabilized at 101.19 points.
The yuan has achieved gains of about 0.2 percent since the beginning of September, bringing its gains since the beginning of the year to 4.3 percent. The People's Bank of China set the currency's guidance rate at 6.7411 yuan to the dollar, a difference of 234 points from Reuters estimates, which is the narrowest difference in two months.
Deputy Director of the Institute of Global Economics and Policy at the Chinese Academy of Social Sciences, Zhang Ming, said that the yuan may move between 6.5 and 6.9 to the dollar during the rest of the year, supported mainly by the dollar's trend. But he pointed out that the scope for further appreciation of the Chinese currency remains limited due to the possibility of the Federal Reserve raising interest rates and the rise in long-term US bond yields.
He added that the Chinese authorities still have tools to intervene if the yuan rises at a speed that threatens foreign trade or capital flows and asset prices, including tightening the management of capital flows and using the counter-cyclical adjustment factor.
Chinese markets enter the National Day holiday with a mixture of government support and external caution. New pledges, especially in the real estate sector, provide some support for sentiment, while the rise in US yields, the strength of the dollar and the future of global monetary policy remain major factors in determining the direction of stocks and the yuan after the resumption of trading.
Relations between the United States and Canada, which were already tense, are likely to deteriorate further, after the United States moved forward, early Tuesday morning, with implementing a decision to ban Canadian imports worth about a billion dollars from entering the American market, including dairy products and motorcycles.
The value of the products scheduled to be banned represents a negligible percentage of the total volume of trade exchange between the two neighbors, which amounts to about 880 billion dollars, but the ban decision, which began to be implemented in the early hours of today, represents a new escalation on the part of US President Donald Trump, in his trade war with one of his country’s oldest allies and trading partners.
Patrick Childers, a trade lawyer, partner at Holland & Knight Consulting, and a former US government trade official, said that banning imports “certainly will do nothing useful in calming trade tensions between the United States and Canada.”
The latest round of trade tensions between Washington and Ottawa began when Trump resorted to a law dating back to the Great Depression in the 1930s, to impose 50 percent duties on Canadian products worth $20 billion, accusing Canada of discriminating against American dairy products, cars, and alcoholic beverages.
Canada responded by imposing duties ranging between 15 and 25 percent on American products for the same value as its products subject to American duties.
To punish Canada for its response to his tariffs, Trump decided to impose a ban on a list of Canadian products, starting from the first minute of the day, US East Coast time.
The economic impact of this ban is likely to be very minor.
Childers pointed out that the list of banned products is already subject to Trump’s high tariffs. “For most of these goods, imposing a 50 percent tariff is an effective ban on them entering the American market; Because it makes importing them from Canada to the United States economically unprofitable.”
Jacob Jensen, director of the trade policy department at the center-right American Business Forum think tank, said the ban actually includes Canadian products worth $967 million, according to past world trade figures. Alcoholic beverages represent about 89 percent of them, due to some Canadian provinces withdrawing American alcoholic beverages from their stores, in response to the trade war that Trump is waging against Canada.
