Sydney, June 15 (BUS): Asian markets were in spectacle on Wednesday as shocked investors waited to see how aggressive the Federal Reserve would be on interest rates, as many feared drastic measures could push the world into recession.
Treasury yields hit a decade high and the dollar hit a 20-year high as futures signaled it was close to the Fed raising 75 basis points to a range of 1.50-1.75% later on Wednesday, according to reports. Reuters.
This will be the largest increase since 1994, and the markets have already recorded rates as high as 3.75 – 4.0% by the end of the year.
“Against the backdrop of rising inflation, rising rates, and growing recession fears, the S&P 500 has seen its worst start to the year since 1962,” Goldman Sachs analysts noted.
“The next peak in inflation will probably not be enough to see the bottom, and previous similar pullbacks only ended when the Fed shifted toward easier policy.”
This may be some time away, so they recommend investors to reduce the portfolio duration and increase exposure to real assets.
With prices higher, a few brave investors were looking for bargains early Wednesday and S&P 500 futures were up 0.4%, while Nasdaq futures were up 0.6%. EUROSTOXX 50 futures are up 0.3%, FTSE futures are up 0.2%.
MSCI’s broadest index of Asia Pacific shares outside Japan held 0.2%, but fell sharply during the week.
Japan’s Nikkei lost 0.6%, although sentiment was helped by a survey that showed an improvement in confidence among Japanese manufacturers.
The data on China’s retail sales and industrial production for May were slightly better than expected, but still showed the impact of the coronavirus shutdowns.
Authorities in Beijing warned on Tuesday that the city of 22 million was in a “race against time” to control its most serious outbreak since the epidemic began.
Bond markets rebounded after the latest hits, with 10-year Treasury yields falling to 3.43%, from Tuesday’s peak of 3.498%.
Two-year bond yields settled at 3.38%, after touching their highest level since 2007 at 3.456% overnight. With many US borrowing rates tied to yields, financial conditions had already tightened significantly there even before the Fed hike.
The dollar has a productivity advantage
Treasury yields are also the benchmark for bonds around the world, so financial conditions are shrinking pretty much everywhere. This is a headwind of strong consumer spending, while putting pressure on emerging market countries that borrow in dollars.
It also tends to support the US dollar, which hit a 20-year high against a basket of currencies, led by big gains on the low-yielding Japanese yen.
The dollar was trading at 135.27 yen, having reached highs visited in 1998 at 135.60.
The latest rally came after the Bank of Japan ramped up its bond purchases to keep yields near zero, even as policy tightens in the rest of the world.
The euro settled at $1.0440, not far from its May low of $1.0348.
The single currency found some support from a hawkish turn by the European Central Bank, but was weighed by signs of stress in domestic bond markets. Revenues of highly indebted members, notably Italy, rose much more quickly than those of Germany, raising concerns about the fragmentation of the European Union.
Higher yields and a stronger dollar weighed on gold, which was near a one-month low of $1,816 an ounce.
Oil prices rose after the Organization of the Petroleum Exporting Countries (OPEC) stuck to its forecast that global oil demand will exceed pre-pandemic levels in 2022.
The price of Brent crude increased 22 cents at $121.39, while US crude rose 20 cents to $119.13 a barrel.