(Bloomberg) — The yen fell after Japan’s ruling coalition failed to win a majority in parliament, fueling speculation that political uncertainty would make the central bank less aggressive. Crude oil fell after Israeli strikes on Iran bypassed oil facilities.
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Japan’s currency fell as much as 1% to 153.88 per dollar on Monday, its weakest level in about three months, after a gamble by Prime Minister Shigeru Ishiba to call early elections backfired. The weaker yen, which benefits the country’s export-oriented economy, helped push the Topix index up as much as 1.6%. European and US stock futures rose.
Much of the yen’s weakness reflects Japan’s ultra-low interest rate levels relative to the US and other major economies. This wide gap is unlikely to change significantly anytime soon, as the Bank of Japan is widely expected to keep its policy rate unchanged at a meeting ending Thursday.
“The likelihood of a minority government in Japan is the new and critically important factor for the future of the markets,” said Masahiko Loo, senior fixed income strategist at State Street Global Advisors. “In this period of uncertainty, we look for a potential positive externality: a larger and more populist fiscal package (at least on the surface), regardless of the coalition’s outcome.”
Elsewhere in Asia, Chinese shares fell after industrial companies’ profits plunged in September, posing a challenge to the economy as deflationary pressures undermine the strength of corporate finances. Meanwhile, China’s central bank has unveiled a new tool to help it better manage liquidity.
Crude oil plummeted after Iran said its oil industry was functioning normally after Israel struck military targets across the country. Brent crude fell and West Texas Intermediate fell more than 5% in early trading before paring. Gold with a lower edge.
Crucial stretching
Markets are gearing up for a barrage of data this week, including Chinese economic activity figures, eurozone and US growth figures, as well as a payrolls report to position portfolios heading into the year.
“As the election approaches and Trump trades are increasingly implemented, the US dollar may continue to lead while US yields remain high, creating a somewhat painful backdrop for emerging market assets,” wrote Barclays Plc strategists led by Themistoklis Fiotakis in a note to clients. While things could get worse if Trump wins, “there is already a degree of election premium built into the currency markets in recent weeks.”