(Bloomberg) — Stocks and bonds in Asia traded lower on Wednesday as traders assessed the impact of an overnight rise in U.S. Treasury yields and comments from a Federal Reserve speaker led to declining expectations for rate cuts by the Fed.
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MSCI’s Asia Pacific Index fell for a second day after shares from Hong Kong, Japan and Australia fell. The sell-off in Australian bonds intensified after inflation figures beat expectations, while Japanese benchmark yields hit their highest level since 2011.
Government bonds were steady in Asia after falling on weak US note sales and ahead of the Fed’s preferred price gauge later this week. China’s yuan fell to its lowest level since November amid signs policymakers are letting the currency fall against a resilient dollar. Emerging Asian currencies, including the South Korean won and the Malaysian ringgit, also weakened.
“The initial reaction is that higher US interest rates and resilient US consumer confidence data are amplifying the risk that rates will remain high for longer,” said Xin-Yao Ng, investment director at Abrdn. “That is generally negative for Asia as it supports a stronger dollar against the Asian currency.”
The yen remained near a nearly 16-year low against the pound. Japan’s currency is falling faster against the euro than the dollar as speculation grows that the European Central Bank will take it easy on cutting interest rates as inflation remains high.
Oil rose further as another attack in the Red Sea added to heightened geopolitical tensions in the Middle East ahead of an OPEC+ meeting this weekend. West Texas Intermediate climbed above $80 a barrel, while Brent futures rose 0.4%.
“The rise in oil prices and the rise in bond yields in both the US and Japan are likely to ensure a softer start to today’s trading session in Asia,” said Tony Sycamore, market analyst at IG Australia in Sydney.
In company news, Lenovo Group said it plans to sell $2 billion of zero-coupon convertible bonds to Saudi Arabia’s sovereign wealth fund, the latest Chinese company to seek capital through such an issue in days.
Fed rates
When Wall Street returned from the holiday weekend, the “T+1” rule went into effect, causing U.S. stocks to settle in one day instead of two.
Investors also waded through comments from Fed’s Kashkari, who said the central bank’s policy is restrictive, but officials have not completely ruled out further rate hikes.
Bond traders awaiting Fed rate policy may soon receive welcome support.
Starting Wednesday, and for the first time since the early 2000s, the Treasury Department will launch a series of buybacks targeting seasoned and harder-to-trade debt. Then, in June, the U.S. central bank will begin phasing out the pace of balance sheet unwinding, known as quantitative tightening, or QT.
The Fed’s frontline inflation gauge is poised to show some modest relief from persistent price pressures, confirming central bankers’ caution about the timing of rate cuts.
Economists expect the price index of personal consumption expenditure minus food and energy – expected on Friday – to rise by 0.2% in April. That would mark the smallest progress so far this year on the measure, which provides a better snapshot of underlying inflation.
Swap contracts currently factor in about 30 basis points of Fed rate cuts for all of 2024 – which amounts to one cut, as Fed actions have historically been 25 basis point increases.
Main events this week:
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Germany CPI, Wednesday
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Fed’s Beige Book, Wednesday
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John Williams of the Fed will speak on Wednesday
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Economic confidence in the eurozone, unemployment, consumer confidence, Thursday
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US initial unemployment claims, GDP, wholesale inventories, Thursday
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The Fed’s John Williams and Lorie Logan will speak Thursday
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Unemployment in Japan, CPI in Tokyo, industrial production, retail sales, Friday
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China official manufacturing and non-manufacturing PMI, Friday
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Eurozone CPI, Friday
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US consumer income, spending, PCE deflator, Friday
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Raphael Bostic of the Fed will speak on Friday
Some of the major moves in the markets:
Shares
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S&P 500 futures fell 0.3% as of 11:56 a.m. Tokyo time
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Nikkei 225 futures (OSE) fell 0.3%
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Japan’s Topix fell 0.3%
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Australia’s S&P/ASX 200 fell 1.3%
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Hong Kong’s Hang Seng fell 1.4%
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The Shanghai Composite rose 0.2%
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Euro Stoxx 50 futures were little changed
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Nasdaq 100 futures fell 0.2%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro was little changed at $1.0847
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The Japanese yen was little changed at 157.30 per dollar
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The offshore yuan was little changed at 7.2649 per dollar
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The Australian dollar was little changed at $0.6647
Cryptocurrencies
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Bitcoin rose 0.6% to $68,626.54
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Ether rose 0.5% to $3,845.85
Bonds
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The yield on 10-year government bonds was little changed at 4.56%
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The Japanese ten-year yield rose by three basis points to 1.065%
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The Australian ten-year yield rose by 15 basis points to 4.41%
Raw materials
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West Texas Intermediate crude rose 0.3% to $80.10 a barrel
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Gold fell 0.3% to $2,354.60 an ounce
This story was produced with the help of Bloomberg Automation.
–With assistance from Rob Verdonck.
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