On European exchanges, stock prices weakened on Friday morning from their highest levels in the last year and a half, as investors analyze incoming financial reports and monitor developments in global bond markets, where yields are rising after the Japanese central bank altered its previous ultra-loose monetary policy.
The pan-European Stoxx 600 index was down 0.3 percent around 10 a.m. It fell from its highest level in the last 1.5 years reached on Thursday, after the European Central Bank (ECB) raised its key interest rate by 0.25 percentage points, but also signaled that it might pause further increases in September.
At the same time, the Frankfurt DAX fell 0.1 percent to 16,389 points, and the Paris CAC dropped 0.35 percent to 7,439 points, while the London FTSE index was up 0.17 percent to 7,705 points.
Investors were unsettled on Friday by the surprising policy change from the Bank of Japan, which has relaxed its previous yield curve control policy on government bonds and eased control over long-term interest rates. Although the Japanese central bank kept its key interest rate at -0.1 percent, the relaxation of yield curve control effectively represents a step towards tightening monetary policy.
As a result, yields on Japanese government bonds jumped to 0.55 percent, and on U.S. bonds exceeded four percent. Yields on bonds in Europe are also rising, which automatically increases the attractiveness of investing in bonds compared to stocks, leading to some capital withdrawal from the stock market.
At the same time, investors are also monitoring new financial reports from companies, with shares of the French IT company Capgemini dropping 7.5 percent after announcing it would invest 2 billion euros over the next three years in artificial intelligence.
The share price of the French pharmaceutical company Sanofi also fell by 2.5 percent, despite the company exceeding earnings expectations. On the other hand, shares of Hermes rose by 3.8 percent due to better-than-expected business results.
On the Tokyo Stock Exchange, the Nikkei index weakened by 0.4 percent to 32,759 points.
Dow Jones Falls 0.67 Percent
On Wall Street, the major indices fell on Thursday following news that the Japanese central bank would allow long-term interest rates to rise, with the Dow Jones breaking its 13-day rise, marking its longest growth period since 1987.
The Dow Jones fell by 237.4 points or 0.67 percent to 35,282 points, the S&P 500 weakened by 0.64 percent to 4,537 points, and the Nasdaq index dropped 0.55 percent to 14,050 points.
The Japanese daily Nikkei reported that the Bank of Japan (BOJ) would maintain its ultra-loose monetary policy on Friday, i.e., the yield cap on government bonds at 0.5 percent, but is considering allowing long-term interest rates to rise above that level. Reuters also confirmed that the Japanese central bank might make some minor adjustments to extend its yield curve control policy.
According to investment strategist Michael Green at Simplify Asset Management, these media reports on Thursday were the main drivers of movement on Wall Street. The prospects for higher interest rates in Japan raised yields on U.S. government bonds above 4 percent, which in turn reduced the attractiveness of stocks as an investment.
– The Nikkei report really came out of the blue. I think market participants will carefully consider the reasons behind it. It is likely related to improving the functioning of the bond market as was the case during the previous move by the Japanese central bank in December – stated Carol Kong from the Commonwealth Bank of Australia.
