Asia's stock markets made a wobbly start to the final full trading week of 2022, with the prospect of interest rates rising further next year taking the edge off festive cheer.
The U.S. Federal Reserve and European Central Bank hiked rates and promised more last week, and speculation is even building that the Bank of Japan, which meets on Monday and Tuesday, is eyeing a shift in its ultra-dovish stance.
Japan's Nikkei (.N225) fell 1.1% and the yen , which rose about 0.4% to 136.20 per dollar, was the biggest mover in otherwise quiet currency trade. MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 0.4%.
Japan will consider revising a 2% inflation target agreed between the government and central bank next year, four sources familiar with the matter told Reuters. News agency Kyodo first reported the potential change. When asked about Kyodo's report, Chief Cabinet Secretary Hirokazu Matsuno said there was no truth the government is set to revise its inflation agreement.
"Where there's smoke, eventually there is fire," said National Australia Bank strategist Rodrigo Catril in Sydney.
"This sort of news we're getting plays to this view that the government will open the door for the BOJ to have a more flexible approach," he said, "and that some of this uber-undervaluation of the yen can be reversed."
The yen has been the worst-performing G10 currency this year, with a 15% loss against the dollar, driven mainly by the gap between rising U.S. rates and anchored Japanese rates.
U.S. rates were steady last week, despite the Fed projecting further hikes ahead, as traders fret that interest rates are already high enough to start hurting economic growth. Ten-year Treasury yields sat at 3.5204%.
The S&P 500 (.SPX) dropped 2% last week. It is down 20% for the year and has failed in several attempts at sustainably trading above its 200-day moving average.
S&P 500 futures rose 0.1%. European futures rose 0.2%. In Europe, equities and the bond market were caught off guard by an unexpectedly hawkish tone from the ECB.
Softening economic data heading into the year-end is not offering much help to the mood either, leaving markets wondering where to look for the feel-good vibe that has helped U.S. stocks rally in the last two weeks of December 11 times in the past 15 years.
"The Santa rally normally kicks in around mid-December on the back of festive cheer and new year optimism, the investment of any bonuses, low volumes and no capital raisings at this time of year," said AMP Capital strategist Shane Oliver.
"It has tended to be weaker or less reliable in years when the market is down year to date, though," he added.
European, Japanese and U.S. business activity shrank in December, surveys showed last week, keeping a bid for the safe-haven dollar and pausing gains for the euro.
Business confidence in China has also hit its lowest since the World Economics Survey began collecting data in January 2013 and China's stock markets have struggled to extend a rally unleashed by easing COVID controls.
Hopes for improvements in demand stabilised oil prices on Monday, with Brent crude futures up 0.8% at $79.70 a barrel, but it has barely gained for the year.
