Asian stocks fell to their lowest level in a week on Friday due to elevated Treasury yields, which were influenced by hawkish comments from U.S. Fed Chair Jerome Powell. Powell’s remarks extinguished expectations of a peak in interest rates. The dollar remained strong as a result. MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1% to a one-week low, while Japan’s Nikkei was 0.50% lower.
On Thursday, Powell and other U.S. Federal Reserve officials expressed uncertainty about whether interest rates are high enough to combat inflation. Powell stated at an International Monetary Fund event that the Fed is committed to implementing monetary policy that is restrictive enough to bring inflation down to 2% over time. However, he admitted that they are not confident they have achieved such a stance.
Powell’s comments, combined with a weak auction of 30-year Treasuries, led to higher yields, which negatively impacted equities and supported the dollar. Rob Carnell, Asia-Pacific head of research at ING, stated that there is no point in leading the market to expect rate cuts until they are necessary. Investors have been searching for signs of U.S. interest rates peaking following the Fed’s decision to hold rates steady last week. This move initially sparked speculation that the rate hiking cycle was over, resulting in a brief rally in risky assets.
Carnell emphasized that the Fed needs to maintain reasonably high rates and bond yields to achieve tighter financial conditions, lower inflation, and ultimately be able to cut rates. He suggested that the Fed should continue its rhetoric of uncertainty and the possibility of further rate hikes until the day before they actually cut rates.
In the U.S., the three major stock indices closed lower, ending the longest winning streaks for the Nasdaq and S&P 500 in two years. This decline was a result of fading market optimism over looser monetary policy. In China, stocks eased by 0.6%, while Hong Kong’s Hang Seng Index was 1.6% lower due to concerns about the country’s economy after data showed a contraction in consumer prices.
Tapas Strickland, head of market economics at NAB, stated that the data puts pressure on Beijing to continue its incremental easing in monetary and fiscal policy. In the bond market, the yield on 10-year Treasury notes slightly decreased, while the yield on the 30-year Treasury bond fell after rising overnight.
The dollar index maintained its overnight gains, standing at 105.87. It also reached a one-year high against the yen and one-week highs against the Australian and New Zealand dollars. In the oil market, U.S. crude slightly eased, while Brent was up on the day. The oil market has been affected by demand concerns and a sell-off triggered by a fading war-risk premium.
Spot gold remained relatively unchanged, but it was on track for its worst week in over a month due to elevated yields and a stronger dollar. Overall, the market sentiment was influenced by the impact of Treasury yields and Powell’s comments.
Reporting by Ankur Banerjee in Singapore; Editing by Tom Hogue
Have a tip we should know? firstname.lastname@example.org