Written by Tom Westbrook
SINGAPORE (Reuters) – Stock markets in Asia were mixed on Thursday, a day after their biggest drop in three months as investors weighed the risk that the Federal Reserve could raise interest rates by 100 basis points next week to tackle soaring inflation.
The Japanese Yen has also started to slide again, receiving only a limited boost from the strongest signals yet of potential market intervention by Japanese authorities.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.1% and 0.2%.
EUROSTOXX 50 futures are up 0.1% and futures are up 0.4%. Nasdaq futures were close to stabilizing. [.N]
“Stock markets at present are in no man’s land,” said Shaun Darby, global equity strategist at Jefferies in Hong Kong.
“The better macro news to support earnings has been ruled out as (there is) a need for further tightening to suppress growth – while CPI data is not dropping fast enough,” he said.
“The best metaphor is that the Fed is not only driving the economy with a rear-view mirror, but is now having to push the ‘rate hike’ accelerator just as bond markets are giving up on excessive tightening.”
Fed fund futures, which were flooded with stocks after Tuesday’s heated US inflation reading, suggest a 30% chance of a 100 basis point rate hike next week. They have a benchmark interest rate in the US of 4.3% by February.
Treasuries were quiet in Tokyo trading on Thursday, but the US yield curve is so inverted – often a signal of an impending recession – that investors believe a rate hike this year and next will stifle future growth. [US/]
Two-year yields, which track near-term interest rate expectations, rose to 3.029%, taking the week-to-date rally to 23 basis points in the seventh consecutive weekly gain.
The benchmark 10-year yield was 3.244% after rising 11 basis points this week.
“(There are) two opposing forces to the 10-year note — upward pressure from Fed increases and downward pressure from a potential future economic slowdown,” said Jan Nefrozi, US interest rate analyst at NatWest Markets.
“We’re more consistent in camp because more increases today raise the odds of a deeper recession.”
line in the sand
China’s beleaguered real estate sector was one of the bright spots on Thursday, with news reports of upcoming government support pushing up Hong Kong’s index of mainland developers by 6.5%. The broadest rose 0.8%. ()
In the currency markets, the US inflation shock and the expectation of corresponding interest rate hikes have sent the dollar up to retest its recent multi-decade highs.
Thursday’s moves were modest, with the Euro dropping slightly to $0.9965 and slightly rising to $0.6758 after some mixed employment data. [AUD/]
The yen, which has fallen nearly 20 percent against the dollar this year, fell again to 143.55 per dollar. It bounced back to 142.56 on Wednesday when the Bank of Japan checked USD/JPY rates with banks around the $145 per dollar level – a potential precursor to buying the yen outright.
Japan has not intervened in the forex markets since 2011, at which time it aimed to rein in an overly strong yen.
“I definitely don’t want to be the one standing here and suggesting this (145 yen per dollar) is the line in the sand,” said Shavali Sachdev, Head of FX, Fixed Income and Commodities for Asia at BNP Paribas. OTC 🙂 Wealth Management in Singapore.
“But what is clear is that the market has been wary of the level, and has tried to test the level several times which seems to indicate that if a break occurs, it could cross that level very quickly.”
Data released on Thursday showed that Japan posted a record trade deficit in August, exacerbated by a weaker yen. That was also another burden on the currency.
Later in the day, European trade data is due, and Chinese President Xi Jinping will meet with Russian President Vladimir Putin in Uzbekistan.
In the oil markets, futures fell 24 cents to $93.86 a barrel. It fell 0.4% to $1,689 an ounce, after falling steadily as the dollar and US yields rose. [O/R][GOL/]