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REFILE-Asian stock prices inch higher as fragile yen sparks intervention concerns

REFILE-Asian stock prices inch higher as fragile yen sparks intervention concerns
REFILE-Asian stock prices inch higher as fragile yen sparks intervention concerns

Asian stocks rose Wednesday, boosted by Japanese shares. Investors?prepared for a quick election in Japan, which could lead to fiscal stimulus. Worries about central bank independence, and 'benign U.S. data on inflation, whipsawed currencies. Gold prices reached a new record high as geopolitical tensions erupted across the globe. Oil prices also rose after U.S. president Donald Trump encouraged Iranians to continue protesting and said that help was on its way. Iran accused Trump, in turn, of inciting violence and encouraging political instability. Early Asian hours saw the Japanese yen at its lowest level since July 20,24, at 159.415 to the dollar. The threat of market intervention was resurfacing. Local media reported Prime Minister Sanae Takaichi considering holding a snap election for the lower house on February 8th. The weak yen, coupled with the prospect of additional stimulus, sent the Nikkei index up by more than 1% to a new record. This pushed Japanese government bond prices lower. Investors are worried about Japan's fiscal health and this "Takaichi" trade has been accelerated in recent weeks. Masahiko?Loo, senior fixed income strategist at State Street Investment Management said that the market movements reflected expectations for fiscal easing. However, they may have been overstated due to political constraints, as Takaichi’s coalition will need opposition support in the upper house of parliament to pass legislation. Loo stated that "any sharp and decisive move beyond 161 (for the yen) level could trigger a renewed intervention to reduce excessive volatility." In that scenario, the expectation of a Bank of Japan interest rate hike could?shift to April and serve as an inflection for currency dynamics. MSCI's broadest Asia-Pacific share index was up by 0.2%, hovering just below the record high reached on Tuesday. Overnight, U.S. stocks ended lower. Financial shares were the main culprit, as comments by JPMorgan executives fueled concerns about Trump's proposal to cap credit card interest rates. Chinese stocks were up 0.7% early in the day, but still a little below Tuesday's 10-year-high. European stock futures increased by 0.1%, signaling a muted opening.

COOLING INFLATION The data released on Tuesday indicated that the U.S. inflation rate was moderate last month. This suggests the import tariffs are not being passed through to the prices, which could mean more rate cuts this year. However, the Fed is expected to "stand pat" this month.

At least two rate reductions this year are being priced in by traders. However, the move is not expected to happen until May when Fed Chair Jerome Powell ends his term. Matt Simpson, senior market analyst for StoneX, says that U.S. inflation has not slowed 'enough' to cause imminent rate cuts. Simpson stated that the US dollar could enjoy a little more of a bid before the tide turns to bearish. The dollar index which measures the performance of the greenback against a basket including the yen, the euro and other currencies, has risen to 99.243, after gaining 0.2% the previous session. Investors were worried about Fed independence in the Trump administration after the U.S. Department of Justice had threatened to indict Fed Chairman Powell over a building renovation. Powell rebuked him for this and on Tuesday, global central bank officials issued a statement of support.

Steve Lawrence, chief executive officer of Balfour Capital Group said that markets seemed to perceive this incident as more political than an actual threat. Lawrence stated that Powell's description of the threat of an indictment is intimidation, which reinforces this interpretation. It signals institutional defence and not escalation. From a market standpoint, this indicates that existing guardrails surrounding the Fed are still considered intact. Gold rose by 0.6%, to $4,613.93 an ounce, and silver soared over 2% to reach a new record. (Reporting from Ankur Banerjee, Singapore; Editing and proofreading by Thomas Derpinghaus.)

(source: Reuters)