A potential BoJ rate hike collided with concerns about US companies’ AI funding costs, challenging hopes for a Santa Rally. Despite the near-term headwinds, the outlook looks brighter for the medium-term.
Below, I’ll outline the key market drivers, the medium-term outlook, and the key technical levels traders should watch.
Bank of Japan Rate Decision Looms
Markets expect the BoJ to raise interest rates by 25 basis points to 0.75% on Friday, December 19. Relative to other economies, a 0.75% interest rate would still be low, supporting yen carry traders, albeit less profitably.
However, the bigger risk is the BoJ’s neutral interest rate announcement. The neutral interest rate is neither accommodative nor restrictive. A higher neutral interest rate would signal multiple rate hikes and a sharply narrower US-Japan rate differential. A marked narrowing in rate differentials would likely trigger a yen carry trade unwind, similar to the mid-2024 event.
For context, the BoJ cut JGB purchases on July 31, 2024, aligning with market expectations, but spooked markets by unexpectedly raising interest rates to 0.5%. The Nasdaq 100 E-mini futures fell from 19,648 on July 31 to 17,351 on August 5, an 11.7% loss. The risk of market disruption on Friday, December 19, exposes US stock futures to short-term downside risks.