 "Global shares regaining stability, but face most monthly losses since 2008")
Global shares rose on Wednesday, regaining stability after the Bank of Japan rocked markets with a surprise decision to loosen its grip on government bond yields, pushing the yen to its biggest one-day gain against the dollar in 24 years.
The MSCI All-World index rose 0.67% on the day, although it is on track for a nearly 4% decline in December. This year, the index is set to have fallen for eight out of 12 months, on a par only with 2008 for the number of monthly losses in a calendar year on record.
On Wall Street, the Dow Jones Industrial Average and the S&P 500 both gained about 1%, and the Nasdaq Composite added 1.1%. They were boosted by stronger than expected earnings at sportswear giant Nike and delivery behemoth FedEx Corp FDX.N.
In Europe, shares more than recovered the previous day's 0.4% drop, helped in part by a rally in sportswear stocks.
On Tuesday, the Bank of Japan (BOJ) widened its trading band for 10-year government bond yields from 25 basis points (bps) either side of zero to 50 bps.
That triggered a leap in the yen, which had fallen for most of the year because of Japan's low yields, as well as selling in Japan's stock market and a selloff for bonds around the world.
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The decision by the BOJ, the last dove of the major central banks, has added to concern among investors about how the impact of rising interest rates and persistent inflation will affect the global economy.
Fund managers are adopting an extremely cautious approach to the start of 2023 and, as such, trading conditions are thin and highly volatile.
"We think recessions are coming in the U.S. and Europe but it's very hard to gauge the amplitude of these recessions right now. This makes it very hard to evaluate earnings potential for 2023 and so it is also very hard to do the usual reasoning about valuations," Bastien Drut, chief thematic macro strategist at CPR, a unit of Amundi, Europe's largest asset manager.
"We've taken profits from the rally in November and our positioning in equities is rather low," he said.
The STOXX 600 rose about 1%, led by the retail sector, including Nike's German rivals Adidas and Puma. The FTSE 100 gained about 0.9%.
The dollar meanwhile crept 0.2% higher against a basket of major currencies, which in turn nudged the gold price off six-month highs, while crude oil bounced by 2% following data that showed a pickup in weekly demand.
The U.S. currency saw its largest one-day fall against the yen in 24 years on Tuesday, dropping almost 4% after the BOJ said it would let long-term interest rates fluctuate more widely. The dollar regained about 0.3% against the yen in U.S. trading on Wednesday.
Some of the major drivers of dollar gains - an ever weaker yen, a struggling Chinese yuan and outsized rises in U.S. yields - are starting to shift. The euro held steady at 1.0609, not far from last week's six-month high. [FRX/]
CARRY TRADES
Bond markets were kept under pressure.
Many now expect some of those in overseas markets that relied on Japan's yields will have to shed some of those "carry" trades to make up for a rising yen.
Aussie bonds sold off heavily and Asian currencies, such as the Singapore dollar, also weakened.
"There appears to be growing caution about inadvertent 'risk off' from unwinding 'carry' and knock-on impact in risk assets," analysts at Mizuho wrote.
Citi analysts said the calm in equity markets might not last, and thin, year-end trading could lead to volatility.
"Our equity traders caution that the most under-priced market risks are roughly how high the structural inflation floor will settle in a post-COVID world.
"We know the Fed is resolutely committed to seeing inflation taper down to 2% and stay there, which suggests it may need to create a lot more pain than markets currently discount in order to reach its target," they said in a note.
Benchmark 10-year Treasury yields were down 4.4 basis points to 3.640%, having touched an overnight high of around 3.72%. Japanese 10-year yields closed up 7 bps at 0.48%, close to the BOJ's 0.5% ceiling. [JP/]
Oil prices rose by more than 2% on Wednesday after data suggested a larger than expected draw in U.S. crude stockpiles, but gains were capped by growing concerns over demand in China and a snow storm that is expected to hit U.S. travel.
(Reporting by Lawrence Delevingne in Boston and Amanda Cooper in London. Additional reporting by Naomi Rovnick in London and Tom Westbrook and Vidya Ranganathan in Singapore. Editing by Christian Schmollinger, Alexander Smith and Barbara Lewis)