Evening Wrap: ASX 200 nosedives on BoJ's surprise, US futures slide

The S&P/ASX 200 closed 110 points lower, down -1.54%.

The local sharemarket tumbled after the Bank of Japan unexpectedly raised its 10-year yield target from 0.25% to 0.5%, every sector was red – notably tech and real estate, RBA posts a no surprises minutes which considered a 50 bp rate hike and US futures currently down around -1.0%.

Let's dive in.

Markets

The ASX 200 closed at session lows after the Bank of Japan expanded its band on yield curve control to 0.50%. This sent the Yen sharply higher or in our case, the Australian Dollar to Yen fell -3.5% to 91.7 to 88.5. The Nikkei also took a sharp fall, currently down -2.9%. Bond yields spiked, with the Australian Government 10-year yield up 4.0 percentage points to 3.74% from 3.59%.

• Explain this to me like I'm 5 years old: Japan is trying to both tightening financial conditions (lift yield curve control band) while pledging more stimulus (still buying government bonds). They're starting to cave in on negative rates, which works against an economy that's built on the near-permanency of low interest rates (debt-to-GDP ratio is also 240% which makes it difficult to service with higher rates). The announcement sent the Yen soaring and equities lower

• Defensive sectors outperformed on a relative basis

• Growth heavy sectors led to the downside

• Yield sensitive sectors like real estate also tumbled

• 179 of the top 200 declined (90%)

Economy

RBA meeting minute highlights:

• "Members also noted the importance of acting consistently, and that shifting to either larger increases or pausing at this point with no clear impetus from incoming data would create uncertainty about the Board's reaction function."

• "The Board did not rule out returning to larger increases if the situation warranted. Conversely, the Board is prepared to keep the cash rate unchanged for a period while it assesses the state of the economy and the inflation outlook."

• "Members emphasised that the Board's priority is to re-establish low inflation and return inflation to the 2 to 3 per cent target over time."

The Bank of Japan kept interest rates unchanged at -0.1% but raised the upper band limit on its yield target to 0.5%.

• "... the Policy Board of the Bank of Japan decided to modify the conduct of yield curve control in order to improve market functioning and encouraging a smoother formation of the entire yield curve, while maintaining accommodative financial conditions." - BOJ Statement on Monetary Policy

• "While significantly increasing the amount of Japanese Government Bond purchases, the bank will expand the range of 10-year JBH fluctuations from the target level: from between around plus and minus 0.25 percentage points ... to 0.5 percentage points."

Commodities 

• Copper -1.3% to US$3.73/lb

• Oil -0.6% to US$75.4/bbl

• Iron ore futures +1.4% to US$109.3/t

Latest news

Post market brief

The ASX 200 was down around -0.7% just before noon and started showing signs of its usual sideways drift. Then it gets absolutely railed by the Bank of Japan announcement and finished the session at lows of -1.54%.

ASX 200 intraday chart (Source: TradingView)

The market closed just above the 200-day moving average but the trend is now quite damaged, with the 20-day rolling over and the 50-day beginning to slope downward.

ASX 200 (Source: TradingView)

The market previously rallied on hopes of peak inflation (which is beginning to take place) and a Fed pivot. Now, we're met with:

• Fed: "Historical experience cautions strongly against prematurely loosening policy. I wouldn't say we're considering rate cuts in a sustained way ... you're correct, there are no rate cuts in … for 2023." - Powell last week

• ECB: "Based on the information that we have available today, that predicates another 50 basis point rise at our next meeting and possibly at the one after that, and possibly thereafter.” - Lagarde last week

• Kuroda and the Bank of Japan drop the tightening bombshell

What does this mean? Well it looks like central banks are committed to hiking until something breaks.

Major announcements

Larger caps (>$1bn)

• Helia Group (HLI) +2.2%: Expects FY22 net claims to be between -$25m to -$40m compared to its previous guidance of -$25m to $25m due to “low claims and low levels of delinquencies experienced over recent months” 

• Domain Holdings (DHG) -9.1%: Noted a -16% decline in new listings in October and -22% in November after 4% growth in 1Q23. The company downgraded its 1H23 earnings but said it expects to see a stronger second half 

• Liontown Resources (LTR) -10.3%: Executed a binding Power Purchase Agreement with Zenith Energy for the supply of electricity to the Kathleen Valley Project for 15 years 

• John Lyng (JLG) -12.3%: Advised that COO Lindsay Barber sold 4 million shares in the company, representing 31% of his prior holding 

Mid-to-small caps

• Galan Lithium (GLN) -4.7%: Announced a maiden drilling program at its newly defined Fry’s Block located within the Greenbushes South Lithium Project 

• Essential Metals (ESS) -12.9%: Lifted its Dome North Lithium Project’s indicated resource by 50% to 8.6m tonnes of lithium 

• Ioneer (INR) -15.8%: Advanced its Rhyolite Ridge Lithium-Boron Project into the final stage of permitting 

• City Chic Collective (CCX) -31.4%: Noted year-to-date revenue down -7% to $157.1m. The company said it has increased promotional activity to “drive demand” 

Trading halts

• Arizona Lithium (AZL): Trading resumes on Wednesday, 21 December, pending an announcement regarding a material acquisition 

• European Lithium (EUR): Trading resumes on Wednesday, 21 December, pending an announcement regarding a long-term offtake agreement

• Image Resources (IMA): Trading resumes on Wednesday, 21 December, pending the release of an updated Ore Reserves announcement

Broker updates 

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