VIX Climbs 10%, Dow's Record Streak Snaps After Bank of Japan's Surprise: Why Are Markets Flipping Thursday?

Risk sentiment sharply deteriorated in Thursday’s afternoon session, and volatility made a strong comeback in the market.

The VIX, the fear index, surged over 10% amid growing speculation the Bank of Japan (BoJ) might consider removing the yield curve control, which limits the 10-year bond yield to 0.5%. The BoJ’s policy meeting is expected at 5 p.m. ET.

Market Reactions: Stocks Fall, Bond Yields Rise And Metals Dip

Major U.S. stock indices all turned red, and the Japanese yen rallied by 1% against the dollar. The USD/JPY pair dipped to 139.

The Dow Jones Index, as tracked by the SPDR Dow Jones Industrial Average ETF DIA broke its record streak of 13 consecutive green sessions, last seen in January 1987 in the post-war period, losing 0.7% for the session.

The S&P 500 and the Nasdaq 100 declined by 0.6% and 0.3%, respectively, despite overall better-than-expected corporate earnings. Small caps suffered the most, with the iShares Russell 2000 ETF IWM falling 1.3%.

Financial stocks experienced a decline following the announcement of new rules by U.S. regulators, with the Financial Select Sector SPDR Fund XLF down 1.3% for the day. The regulations mandate that banks holding over $100 billion in assets must increase their capital requirements by a total of 16%.

On the bond market, yields sharply rose on longer maturities, with the 10-year Treasury yield jumping 13 basis points to 4%. The 30-year Treasury reached a yield of 4.05%, up by 12 basis points during the session.

The iShares 20+ Year Treasury Bond ETF TLT declined by 2%, marking the third-worst day of 2023 so far.

Among commodities, gold slid 1.3% below $1,950/oz, erasing all post-Fed meeting gains, while silver tumbled 3.3% to $24.2/oz.

Crude oil remained stable, with WTI grade gaining 1% during the session, flirting with $80 per barrel.

Why Is The Market Reacting To Bank of Japan’s Move?

Benzinga’s Take: The rise in Japanese bond yields could potentially drain a significant amount of liquidity invested in risk assets globally, redirecting it toward safer investments like bonds.

The BoJ was the last bastion of a world still grappling with negative interest rates, and its potential shift could mark the end of an era.

Japan holds the largest amount of U.S. Treasuries, with $1.1 trillion in holdings according to the latest data from March 2023, released by the Department of the Treasury and Federal Reserve Board.

Even a small change in Japanese interest rates and yields can move a considerable amount of money in financial markets.

Now Read: Fed’s Preferred Measure Of Inflation In Focus: How June’s PCE Inflation Figure Plays Into September Rate Decision

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