Japan's Nikkei 225 has gained 1.5% since the start of the day on Monday, thanks to a weaker yen.
Bargain hunters are buying shares of IT giants on the Chinese markets on signs that a constructive dialogue between the US and China on trade has returned, indicating a risk-on mindset for market participants.
Meanwhile, the yen is selling off against the dollar. Since the last Fed meeting on Sept. 22, the USD/JPY rose 3.4% from levels around 109 to 113 after a slight pause.
The difference in monetary policy dynamics between the Federal Reserve and the Bank of Japan (BoJ) sparked the rally. The American regulator continues to move away from crisis measures, promising to soon cut back on its balance sheet purchases.
In an era of near-zero interest rates, this is the main instrument of monetary support. In contrast, no such move is expected from the BoJ.
The pressure on the yen against the US dollar intensified because of a surge in energy prices, which Japan predominantly imports, while the USA has its reserves and production.
The jump in oil, gas, and coal puts pressure on the trade balance, turning historically surplus values into deficits. The situation is similar in other countries that actively import commodities.
It is worth noting that before the pandemic, the US briefly became a net energy exporter. Now oil and gas production is down, and reserves are falling, but the US has considerable potential to ramp up production.
Thanks to the diversification of the economy, the US market in general and the dollar are not as exposed to pressure from surging oil and gas prices.
Meanwhile, energy prices have returned to the upside. WTI surpassed $80 Monday morning, renewing its highs since 2014. The US natural gas price stabilized near $5.84, pulling back from extremes of $6.5, while more than doubling 2020 support levels at $2.5.
Besides, Americans continue to ramp up production, which has already increased to 11.3m BPD. Further growth in drilling activity promises to translate into increased production over the next 6-9 months.
The US energy sector promises to benefit from a red-hot energy market. It is not surprising that US lawmakers have abandoned further interventions to sell oil reserves from strategic reserves in such an environment.
A weaker yen supports interest in equities, returning the Nikkei 225 to growth. At the same time, high and rising energy prices pose a serious threat to corporate earnings, which is harmful to the stock market and will require an expansion of support programs from the Bank of Japan.