Asian stocks fell on Monday as markets expected further hikes in US and European interest rates, putting pressure on global bonds and pushing the dollar to multi-week highs.
Investors are bracing for more tough US data, including closely watched ISM manufacturing and services metrics, the latter particularly important after the unexpected surge in activity in January.
No fewer than half a dozen Fed policymakers are on the speaker’s agenda this week to provide ongoing commentary on the prospect of another rate hike.
Production polls are being conducted in China and the National People’s Congress will begin over the weekend, during which New Economic Policy goals and policies will be discussed, as well as a cabinet reshuffle of government officials.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5%, after losing 2.6% last week. Japan’s Nikkei fell 0.4% and South Korea’s 0.9%.
S&P 500 futures were flat, while Nasdaq futures were up 0.1%. Strong data on spending and core prices led the S&P 500 to break support at 4,000 on Friday, reversing 61.2% of this year’s rally.
Prices are now peaking around 5.42%, which means at least three more hikes from the current range of 4.50% to 4.75%, according to Fed Futures. The markets also raised potential highs for the European Central Bank and the Bank of England.
Bruce Kasman, head of economic research at JPMorgan, raised the ECB’s forecast by another quarter point, to 100 basis points. The two-year German bund yield broke above 3.0% for the first time since 2008 on Friday.
“The risk is clearly geared towards more action by the Fed,” Kassman said.
He added, “Demand is proving resilient despite the tightening and the ongoing damage to supplies from the pandemic limits inflation moderation.” “The conveyance of the rapid policy change that is still underway also increases the risk of a recession that central banks did not intend.”
According to the Atlanta Federal Reserve’s now influential GDP tracker, the US economy grew at an annualized rate of 2.7% in the first quarter, with no slowdown from the December quarter.
Interest rates and yields increase stock valuations, especially those with high dividend-earnings and low dividend payments, including much of the technology sector.
US stocks trade at a P/E of about 17.5 times forward earnings, versus 12 times for non-US stocks.
Ten-year Treasury notes also yield more than twice the dividend yield estimated by the S&P 500, with much lower risk.
As earnings season draws to a close, about 69% of earnings are surprised, versus a historical average of 76%, and annual earnings growth is about -2%.
The upward shift in the Fed’s outlook is a boon for the US dollar, which rose 1.3% against a basket of currencies last week, to stand at 105,220.
The euro stopped at $1.0548 after hitting a seven-week low of $1.0536 on Friday.
The dollar hit a nine-week high against the yen at 136.40, supported by dovish comments from senior policymakers at the Bank of Japan.
The rising dollar and interest rates weigh on gold, which lost 1.7% last week and was last traded at $1,812 an ounce. [GOL/]
Oil prices rose slightly as the prospect of lower Russian exports was offset by rising inventories in the US and concerns about global economic activity. [O/R]
Brent crude rose 35 cents to $83.51 a barrel, while US crude rose 34 cents to $76.66 a barrel.
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