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Shanghai Jan 27 (BNA): Asian stocks slumped to nearly 15-month lows, US short-term yields surged to 23-month highs, and the dollar strengthened Thursday after the Fed chief signaled plans to tighten policy significantly steady.
At the same time, growing investor concerns about political tensions between Russia and Ukraine have exacerbated concerns about a tight supply in the energy market, sending oil prices to multi-year highs despite some profit-taking.
In its latest policy update on Wednesday, the Fed signaled it was likely to raise US interest rates in March, as was widely expected, and reiterated its plans to end its bond purchases that month before launching a massive reduction in asset holdings.
But in his follow-up press conference, Powell warned that inflation remains above the Fed’s long-term target and that supply chain problems may be more urgent than previously thought.
“There was a noticeable shift in terms of relatively dovish comments and then a relatively hawkish press conference,” said David Chao, global market analyst, Asia Pacific (former Japan) at Invesco.
“Powell is not committed to the size or frequency of price increases and also the timing of the balance sheet cut. I think that gives him some wiggle room in terms of how fast and how quickly he wants to normalize monetary policy in the US… It depends very much on the data so we are definitely watching other economic data that will be Its release especially inflation data and inflation expectations data, which I believe could lead to a more aggressive tightening in monetary policy.”
Federal fund futures showed that traders are seeking up to five hikes by December, after previously fully pricing four hikes, according to Reuters.
Fears that the Federal Reserve will give increasing priority to fighting the inflation that is plaguing stock markets. MSCI’s broad gauge of regional markets outside Japan fell more than 2% on Thursday to its lowest level since November 5, 2020.
Hong Kong’s Hang Seng and Australian stocks fell more than 2% and Chinese blue chips fell to their lowest level since September 30, 2020 as Refinitiv flows data indicated heavy selling by foreign investors through the country’s Stock Connect scheme.
In Tokyo, the Nikkei fell more than 2.5%, hitting its lowest level since November 26, 2020.
The decline repeated a sharp reversal in US stocks overnight. The S&P 500 closed 0.14% lower following Powell’s comments after earlier rising more than 2%, and the Nasdaq Composite closed barely higher, erasing a rally of more than 3.4%.
The policy-sensitive two-year US yield jumped on expectations of a Fed tightening, rising to a high of 1.1920% in morning trade in Asia, a level last reached in February 2020. The 10-year benchmark also rose from Wednesday’s close, up to 1.8566% from 1.846%.
The dollar rallied on higher yields, pushing the US Dollar Index, which measures the greenback against major currencies, to 96.604, near five-week highs.
The yen settled at 114.63, while the euro fell 0.1 percent to $ 1.1225.
“It seems like an interesting play is that yield spreads matter again, so we have a good setup on dollar-yen. If you look at the two-year yield differential in the US and Japan, it has just been pictured,” said Matt Simpson, senior market analyst at City Index in Sydney”.
The spread between US and Japanese two-year bond yields widened to 124.22 basis points on Thursday, the highest level since late February 2020.
In the commodity markets, oil prices declined but remained elevated near $90 a barrel, a level last seen in October 2014, due to heightened tensions between Russia and Ukraine.
The United States said on Wednesday it had embarked on a diplomatic path to address sweeping Russian demands in eastern Europe, as Moscow held security talks with Western countries and ramped up its military build-up near Ukraine with new exercises.
On Thursday, global benchmark Brent crude fell 0.64 percent, on profit-taking, to $89.38 a barrel. US West Texas Intermediate crude fell 0.6 percent to $86.83 a barrel.
US officials say they are in talks with major energy producers and companies around the world about a possible diversion of supplies to Europe if Russia invades Ukraine, although the White House has said it faces challenges in finding alternative sources of energy supplies. Read more
And the spot gold price fell 0.12 percent to $ 1815.88 an ounce.
“When you see gold going down with stocks, it’s usually a sign that things aren’t OK, but you can really tie everything back to the Fed raising rates, the dollar screaming higher with yields, and everything else going in the opposite direction. Simpson said on City Index.
HF