Global financial markets began Tuesday with a cautious tone, grappling with a significant selloff in government bonds and a sharp downturn in cryptocurrencies. The primary trigger was growing anticipation that the Bank of Japan (BoJ) is preparing to raise interest rates, a monumental shift after years of ultra-loose monetary policy.
Market Tremors from Tokyo to Wall Street
The unease followed a slide on Wall Street overnight. While S&P 500 futures steadied in early Asian trade, the bond market remained under intense pressure. The yield on the benchmark 10-year Japanese Government Bond (JGB) climbed 1.5 basis points to 1.88%, marking its highest level in 17 years. This surge came ahead of a critical 10-year bond auction, with investors worried about Japan's long-term fiscal health.
The bond market turbulence was not confined to Japan. As Japanese yields rose, it sparked a global bond selloff. Traders, possibly anticipating that higher returns in Japan could lure capital back home, offloaded bonds worldwide. This pushed the yield on the 10-year U.S. Treasury note up by 7.7 basis points to 4.08%.
Cryptocurrency Winter Deepens
Adding to the risk-off sentiment was a dramatic slump in the cryptocurrency market. Bitcoin, often seen as a barometer for speculative appetite, plunged 5.2% on Monday. Its price hovered around $87,000, representing a staggering 30% decline from its peak recorded in October.
Jehan Chu, founder of blockchain venture firm Kenetic Capital, described the mood among crypto investors as ranging "between fearful and resigned." He noted that the latest drop caught many by surprise, stating, "The next couple months are crucial but even the most bullish may be settling in to hibernate for the winter."
Diverging Central Bank Paths: Japan Hikes, Fed Cuts
The catalyst for the bond market moves was commentary from Bank of Japan Governor Kazuo Ueda on Monday. He laid clear groundwork for a potential tightening of monetary policy, supercharging expectations for an interest rate hike later in December.
This stands in stark contrast to the expected path for the U.S. Federal Reserve. Recent data, including a report showing U.S. manufacturing contracted for a ninth consecutive month in November, has bolstered expectations for a Fed rate cut in December. This policy divergence is reshaping currency markets.
The yen strengthened on the BoJ speculation, holding firm at 155.75 against the U.S. dollar. Meanwhile, the greenback found itself on the back foot. Strategists at Deutsche Bank, including Tim Baker, argue the dollar is set for a more durable decline. Baker points out that December has been the dollar's worst month over the past decade, falling 80% of the time with a median loss exceeding 1%.
"The U.S. data remains decent enough – but the rest of world is on a firmer footing," Baker said, seeing scope for the dollar to weaken towards year-end.
In other asset classes, gold held onto recent gains above $4,200 an ounce. Oil prices also edged higher, with Brent crude futures rising to $63.26 a barrel, supported by drone attacks on Russian supply infrastructure.
For Indian investors and markets, these global crosscurrents are critical. A weaker dollar can influence rupee dynamics and foreign investment flows, while global bond yield shifts affect the cost of capital worldwide. The crypto crash further underscores the volatility in high-risk asset classes.
