European stocks and bonds slide after Bank of Japan policy shift

Receive free Markets updates

We’ll send you a myFT Daily Digest email rounding up the latest Markets news every morning.

European stocks and bonds fell on Friday, as the Bank of Japan’s decision to relax its grip on the government bond market rippled through global assets.

The region-wide Stoxx Europe 600 lost 0.3 per cent, having hit its highest level in more than a year in the previous session, while France’s Cac 40 fell 0.4 per cent and Germany’s Dax gave up 0.3 per cent.

Germany’s 10-year bond yield climbed 0.05 percentage points to 2.49 per cent, while the UK 10-year yield climbed 0.06 percentage points to 4.37 per cent.

The moves came after the BoJ announced a tweak to its policy of capping 10-year domestic government bond yields at 0.5 per cent, saying this level was now a “reference” rather than a “rigid limit”. The central bank said it would use bond purchases to stop yields climbing above 1 per cent.

The 10-year yield on Japan’s government debt climbed as far as 0.57 per cent, a nine-year high.

However, the BoJ opted to stick to the overnight rate of minus 0.1 per cent as it concluded its two-day policy meeting on Friday, saying that more time was needed to achieve its 2 per cent inflation target sustainably.

US treasury yields had already increased sharply on Thursday, while a stock rally on Wall Street melted away, following a report that the BoJ was planning to tweak its bond market interventions.

Ten-year treasury yields were down slightly at 4 per cent on Friday, but remained far above the level of 3.8 seen before the BoJ news.

Japan’s yen, which had strengthened against the dollar in morning trading, briefly fell as much as 1.1 per cent, before settling at ¥139.47. The benchmark Topix stock index fell 0.2 per cent.

Futures contracts tracking Wall Street’s benchmark S&P 500 added 0.3 per cent, while those tracking the tech-focused Nasdaq 100 gained 0.6 per cent ahead of the New York open.

In Europe, data on Friday showed that annual inflation in France slowed to 5 per cent in July, down from 5.3 per cent in the previous month. In Spain, the rate increased contrary to market expectations, rising to 2.1 per cent, from 1.6 per cent in the previous month.

Investors awaited more inflation data from Germany later on Friday, followed by the eurozone-wide figure on Monday, in hopes to gauge the European Central Bank’s future path for interest rates in the region.

The moves come a day after the central bank lifted rated for the ninth successive time, by 0.25 percentage points to 3.75 per cent, having commenced its tightening campaign one year ago in an effort to tame the region’s stubborn price pressures.

Separate data on Friday showed that German economy stagnated in the three months to June, following a 0.1 per cent decline in the first quarter and a 0.4 per cent contraction in the fourth quarter.

The reading came in below the 0.1 per cent expansion forecast of economists polled by Reuters, in a sign that high borrowing costs weighed on the eurozone’s largest economy.

Growth in Spain slowed to 0.4 per cent over the same period, from 0.5 per cent in the previous quarter.

While policymakers left the door open for more tightening to come, the majority of investors bet that rates would remain unchanged at the ECB’s next meeting in September, according to data compiled by Refinitiv and based on interest rate derivatives prices.

Asian equities outside Japan bucked the downward trend on Friday, with Hong Kong’s Hang Seng index rising 1.4 per cent and China’s benchmark CSI 300 adding 2.3 per cent.