Asian stocks, bonds and currencies tumbled in the wake of the broad-based selloff on Wall Street after hotter-than-expected inflation data fuelled bets for jumbo interest-rate hikes by the Federal Reserve.
Equity indexes in Japan, Hong Kong and Australia slumped after US shares had their biggest drop in more than two years, with the S&P 500 falling more than 4 per cent and the Nasdaq 100 sliding more than 5 per cent. European equity futures fell while US contracts edged higher.
Japan’s 10-year bond yield rose to 0.25 per cent, the upper end of the central bank’s policy band while the yen fluctuated below the key 145 level versus the dollar. The finance minister warned that Japan wouldn’t rule out any response if current trends in the yen continued and those options included stepping into markets.
Swaps traders are certain the Fed will raise interest rates three-quarters of a percentage point next week with some wagers appearing for a full-point move. That leaves investors weighing the prospect of tighter conditions across a swath of markets after jumping back into risk-sensitive assets in recent days on hopes that inflation would cool more.
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The two-year Treasury yield, the most sensitive to policy changes, climbed further in Asia after jumping as much as 22 basis points, pushing it more than 30 basis points above the 10-year rate and deepening an inversion in what is generally a recession warning. Australia’s benchmark 10-year yield jumped 10 basis points.
“Markets had tried desperately to spin a bull case and fight the Fed, basically, and that’s a dangerous place to be, Carol Schleif, deputy chief investment officer at BMO Family Office said on Bloomberg TV. Looking further ahead, she pointed to “a great deal of fiscal stimulus on its way into the market to take some of the place of the monetary stimulus that’s being withdrawn.
The US consumer price index increased 0.1 per cent from July, after no change in the prior month, Labor Department data showed. From a year earlier, prices climbed 8.3 per cent, a slight deceleration but still more than the median estimate of 8.1 per cent. So-called core CPI, which strips out the more volatile food and energy components, also topped forecasts.
The reversal in markets casts a dark shadow over the debate about the outlook for the global economy and markets. Bank of America’s latest survey showed the number of investors expecting a recession has reached the highest since May 2020.
A gauge of the dollar fluctuated after climbing more than 1 per cent on the CPI report. The greenback’s strength weighed Asian currencies, with the Korean won falling about 1.5 per cent. The People’s Bank of China set the daily reference rate for the yuan at the strongest bias on record versus the average estimate in a Bloomberg survey of analysts and traders.
“Many emerging markets are feeling the heat of the strong US dollar, said Chi Lo, senior market strategist for Asia Pacific at BNP Paribas Asset Management, citing their debt burdens in greenbacks. “Only China can afford to defy this global rate-rise trend by keeping its easing policy stance.
Bitcoin nursed a drop of more than 10 per cent overnight, the biggest decline since cryptocurrencies plunged in June. - Bloomberg
