Elon Fires Himself…

It’s the holiday season, sure, but last week was definitely an eventful one. The Bank of Japan (BoJ) stunned markets with an unexpected change to its yield curve control program, sending shockwaves through Japanese markets. Twitter users voted for Elon Musk to step down as the social network’s CEO, marking the end of less than two chaotic months at the helm. Initial public offerings, meanwhile, are heading for their longest drought since the global financial crisis, according to new data out last week. Last but not least, European nations reached a milestone deal to cap natural gas prices in the latest attempt to curb soaring energy prices in the bloc.

Macro

The BoJ shocked markets on Tuesday with a surprise change to its controversial yield curve control policy, which aims to keep 10-year government bond yields within a tight range around a target of 0%. Until now, the BoJ has been an outlier among central banks, maintaining an easy monetary policy stance while most have been rapidly tightening policy. That changed on Tuesday, when the Japanese central bank adjusted its yield curve control program to allow 10-year bond yields to fluctuate by plus or minus 0.5%, instead of the previous 0.25%, bucking forecasts for no change at its policy meeting. The move triggered big market swings, with the yen and Japanese government bond yields surging. Japanese stocks, meanwhile, tumbled as a stronger yen is seen as a negative for firms’ overseas earnings.

While the central bank said that the measure is “not a rate hike” and is instead aimed at enhancing the sustainability of its monetary easing, many economists interpreted the move as laying the preliminary groundwork for exiting a decade of ultra-loose monetary policy. The BoJ’s efforts to defend its yield curve control targets have contributed to a massive reduction in market liquidity and what some analysts have described as “dysfunction” in the Japanese government bond market. For example, the central bank now owns more than half of outstanding bonds, compared with 11.5% when the current BoJ governor took over in March 2013…

Stocks

Elon Musk – the billionaire CEO of Tesla and SpaceX – bought Twitter for $44 billion in October, and it’s been nothing but turmoil ever since. During his tenure heading the social media platform, Musk dismissed top executives, eliminated roughly half of its employees, spooked advertisers with abrupt policy changes, and more. The drama continued last week, with Twitter users voting for Musk to step down as the social network’s chief executive in a poll launched by Musk himself. According to the final results of the poll, which closed last Monday, 57.5% of the 17.5 million users who responded voted in favor of Musk stepping down. However, it’s still unclear who Musk will select as his replacement. To quote the man himself: “I will resign as CEO as soon as I find someone foolish enough to take the job!”

Shares of Tesla – the billionaire’s other little venture – rallied on the news. That’s because Musk has been drawing criticism for focusing too much on Twitter and neglecting his other businesses. What’s more, Musk offloaded yet another tranche of Tesla stock earlier this month, worth almost $3.6 billion, in his third sale since declaring in April that there would be “no further TSLA sales” to support the Twitter deal. The selling has been one factor behind Tesla’s share price drop of more than 60% this year, underperforming rival car firms including Ford and General Motors.

Moving on, new data out last week showed that initial public offerings (IPOs) are heading for their longest drought since the global financial crisis. Just $207 billion has been raised from IPOs globally this year – down 68% from the year before, putting the IPO market on track for its biggest year-on-year fall in proceeds since 2008. The main culprit is aggressive interest rate hikes aimed at taming rising inflation that have hurt stock market valuations and eroded investor appetite for the high-growth IPO candidates that have driven deals in recent years. 

It’s worth pointing out that the US IPO market has been one of the biggest drags on global activity, hit by a huge collapse in the blank-check deals that were behind 2021’s surge (i.e. IPOs of special purpose acquisition companies, or SPACs). US listing volumes of $24 billion are the lowest since 1990, and down 93% from 2021. That weakness was partially offset by China and the Middle East – two markets that saw a surge in IPOs in 2022.

Bankers don’t expect a revival anytime soon either, saying that stability around inflation and visibility on the trajectory for interest rate hikes are needed before IPO activity can properly resume again. That’s likely to come in the second quarter of next year, so don’t hold your breath in the meantime…

Commodities

European nations reached a deal last week to cap natural gas prices at €180 per megawatt-hour (MWh) – significantly lower than an earlier proposal of €275. The cap, which comes into force for one year on February 15, is the latest attempt to curb soaring energy prices in the bloc and help consumers and businesses after the region lost much of its Russian gas imports. But while the mechanism may help prevent extreme price swings, it may cause valuable gas supplies to be redirected from Europe to higher-paying regions (like Asia), leaving the bloc vulnerable to insufficient supply. What’s more, by artificially lowering prices, the cap could encourage more consumption and make the gas supply deficit worse.

So how does the cap work exactly? The mechanism requires several triggers before it can take effect: benchmark Dutch TTF gas prices must be above €180/MWh, and they also must be at least €35 greater than global liquefied natural gas (LNG) prices. Prices would have to stay above both ceilings for three days for the mechanism to become activated. Once triggered, it will remain in place for at least 20 working days and apply to all EU gas-trading hubs.

This week

Expect a very quiet week due to Christmas holidays with light trading volumes. The economic calendar is quite light, but here are some key releases happening this week.

• Monday: An official holiday in most countries (markets will be shut).
• Tuesday: Japanese unemployment rate (November)
• Wednesday: US pending home sales (November), Japanese industrial production (November)
• Thursday: US weekly initial jobless claims
• Friday: US PMI index (December)