Yen Strength Pressures Nikkei as BOJ Rate Hike Bets Rise

Japanese stocks fell as the yen strengthened beyond 155 per dollar for the first time in a month, driven by increasing bets on a BOJ rate hike next week. US markets ended lower, weighed by disappointing corporate earnings and Big Tech performance, while the dollar weakened after six weeks of gains. European markets await UK retail sales data and the final euro zone consumer inflation reading, with caution prevailing ahead of Donald Trump's upcoming inauguration.

Equities

The FTSE 100 rose 1.1% on Thursday, closing at its highest level in nearly eight months. Investors were buoyed by strong corporate earnings and slowing inflation, which bolstered hopes for further interest rate cuts from central banks. The midcap FTSE 250 also gained 1%, marking its best close in ten days.

Burberry led the blue-chip index, rising 4.1% after Richemont reported stronger-than-expected sales, which lifted sentiment across the luxury goods sector. Watches of Switzerland saw its shares jump 8.1%, while Deliveroo climbed 6.6% following news of robust growth in the fourth quarter and a raised earnings forecast. Trustpilot recorded the biggest gain, up 16.6%, after forecasting full-year adjusted profits ahead of expectations. Taylor Wimpey fell 2.9%, citing rising costs in the housing sector.

In the US, the major indices slipped after Wednesday’s strong rally. The S&P 500 fell 0.21%, the Nasdaq dropped 0.89%, and the Dow Jones dipped 0.16%. Investors remained cautious as economic data showed strong consumer spending and labour market conditions, which could influence the Federal Reserve’s pace of interest rate cuts.

Morgan Stanley rose 4.03% after reporting higher fourth-quarter profits, driven by increased dealmaking activity. Bank of America fell 0.98% despite forecasting higher interest income for 2025. Apple shares declined 4.04% after a report revealed the company had lost its position as the top smartphone seller in China to Vivo and Huawei in 2024. UnitedHealth shares slid, weighing heavily on the Dow, after its quarterly revenue fell below expectations.

Treasury yields declined, with the 10-year yield dropping to 4.615%, as Fed Governor Christopher Waller suggested rate cuts could come sooner than expected due to easing inflation. However, lingering concerns about inflationary policies under President-elect Donald Trump and his nominee for Treasury Secretary, Scott Bessent, added to market caution. Bessent indicated potential sanctions on Russia’s oil sector and raised warnings about the economic risks if Trump’s 2017 tax cuts were allowed to expire.

 Forex & Commodities

The yen strengthened, achieving its best weekly performance in over a month, driven by expectations of a Bank of Japan rate hike next week. It reached a one-month high of 155.10 per dollar before slightly retreating to 155.62. The dollar index dropped 0.5% this week, snapping a six-week winning streak as softer US inflation data raised expectations for multiple Federal Reserve rate cuts in 2025. Treasury yields followed suit, with the 10-year yield down to 4.612%, marking its weakest weekly performance in over a month.

Gold prices steadied near a five-week high, gaining 1% this week to $2,711.63 per ounce, supported by rate cut expectations and a weaker dollar. US retail sales data for December indicated robust consumer demand, bolstering the view of a cautious approach from the Fed. Fed Governor Christopher Waller’s comments reinforced hopes for up to four rate reductions this year.

Oil prices fell on Thursday after Yemen's Houthi militia signalled a halt to Red Sea shipping attacks. Brent crude declined 0.9% to $81.29 per barrel, while West Texas Intermediate dropped 1.7% to $78.68. Earlier concerns over disrupted shipping routes eased, but US sanctions on Russia and President-elect Donald Trump’s upcoming policies kept the outlook uncertain. Investors anticipate potential tensions between Trump and OPEC over higher oil prices, reminiscent of his first term’s approach to the group.