Asian stocks rally sputters as China pulls back, higher U.S. yields weigh

Sydney, March 2 (BNA): Asian stocks rose faltered Thursday, pressured by falling Chinese stocks and rising US yields amid fears that the Federal Reserve will continue to raise interest rates to combat viscous inflation.

European markets are likely to open firm, with futures across the region on the Euro Stoxx 50 largely unchanged, as caution was put in place ahead of the release of European inflation data for February.

The median forecast is for an annual figure of 8.2%, but the risks are to the upside after surprises from France, Spain and Germany.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan lost 0.4%, reversing some of the 2.1% gain in the previous session – the index’s best day in two months. Japan’s Nikkei was largely flat.

Hong Kong’s Hang Seng fell 0.8%, after posting its biggest daily gain in nearly three months on Wednesday when it jumped 4.2% on unexpectedly strong readings from China PMI surveys.

Investors’ enthusiasm for China’s economic reopening has somewhat faded after Beijing loosened its strict COVID-19 controls in December, as analysts look for more clues to gauge the pace of economic recovery.

China’s annual meeting of the CPC National Congress may provide more stimulating clues when it kicks off this weekend to set economic goals and elect new chief economic officials.

“Financial markets are caught between two narratives of a softer landing, aided by China’s reopening, and steady inflation that keeps policy rates higher for longer,” said Chris Turner, ING’s head of global markets.

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“This is likely to keep the bond markets rattled and the forex markets volatile in ranges.”

S&P 500 futures fell 0.5%, and Nasdaq futures fell 0.6%, dragged down by a 5.5% drop in Tesla shares in after-hour trading.

The company will cut vehicle assembly costs by half in future generations of cars, but CEO Elon Musk hasn’t unveiled a long-awaited affordable compact electric car.

Overnight, both bonds and stocks took a hit, as inflation indicators from Germany and the US reinforced expectations that interest rates would rise and stay there for longer.

The two-year German government bond yield rose to its highest level since October 2008.

In the United States, manufacturing activity contracted for the fourth consecutive month in February, but a measure of raw materials prices increased last month, raising fears of persistent inflation.

“The manufacturing PMI data provides a mixed message to global risk appetite, with positive growth trends improving, but output price declines stalling,” said Alan Ruskin, macroeconomic analyst at Deutsche Bank.

Benchmark 10-year Treasury yields hit a four-month high of 4.028%, while the two-year yield also advanced to 4.9310%, a new 15-year high.

Investors still mostly expect the Federal Reserve to raise interest rates by 25 basis points at its next meeting later this month, but expectations for an even larger 50 basis point hike have increased. The probability that the Fed’s policy rate, currently set in a range of 4.5% to 4.75%, could peak above 5.5%, is at 53%, compared to 41.5% on Feb. 28, according to the CME Fed Tool.

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Minneapolis Fed President Neel Kashkari said he was inclined to “nudge my policy course” after a recent government report showed the Fed’s preferred inflation indicator accelerated in January to a 5.4% annual rate, more than double the Fed’s target of 2%, slightly faster than the previous month.

In currency markets, the US Dollar Index, which measures the value of the greenback against a basket of major currencies, rose 0.2% to 104.62.

The euro lost 0.2% to $1.0641, reversing some of its 0.8% gains overnight, as German inflation rose more than expected adding pressure on the European Central Bank to raise interest rates.

In the cryptocurrency world, shares in Silvergate Capital fell as much as 28% after the cryptocurrency-focused bank said it was postponing its annual report and assessing its ability to operate as a going concern.

Oil prices were largely flat on Thursday, after rising 1% the previous day on optimism about China’s recovery. US crude settled at $77.72 a barrel. Brent crude remained largely unchanged at $84.38 a barrel.

Spot gold is down slightly at $1,832.73 an ounce.


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