SYDNEY (Reuters) – Asian stock markets fell Friday after a spike in global bond yields soured sentiment towards expensive-priced tech stocks, while a rush from overcrowded positions may have ended the crude oil bull run.
After a rapid drop of 7% overnight, Brent crude oil futures saw a weak rebound from just 11 cents to $ 63.39 a barrel, while US crude added 6 cents to $ 60. 06. [O/R]
The retreat wiped out four weeks of gains in a single session amid concerns that global demand would fall short of high expectations.
Markets were also troubled by the Bank of Japan’s (BOJ) decision to slightly broaden the 10-year yield target and adjust asset purchases.
The bank described the changes as a ‘nimble’ way to make easing more sustainable, although investors seemed to view it as a step back from total stimulus.
A decision to limit purchases to only TOPIX-linked ETFs caused the Nikkei to drop 1.6%, while South Korea lost 1%. MSCI’s widest index of Asia-Pacific stocks outside Japan, followed by a 1.5% decline.
Chinese blue chips lost 1.9%, perhaps discouraged by a fiery exchange between Chinese and US diplomats in the first face-to-face talks about the Biden era.
Nasdaq futures held flat after a sharp 3% overnight drop, while S&P 500 futures added 0.1%. European futures followed the overnight decline with the EUROSTOXX 50 of 0.8% and FTSE futures 0.6%.
Investors still remember the US Federal Reserve’s pledge to keep interest rates close to zero until 2024, even as expectations for economic growth and inflation have raised.
Fed Chairman Jerome Powell looks likely to be bringing home the moderate message next week with no less than three appearances in a row.
“Stronger growth and higher inflation, but not rate hikes, is a powerful cocktail for risky assets and stock markets,” said Nomura economist Andrew Ticehurst.
The message for bonds is more mixed: while the anchoring of the short end is positive, market participants may start to worry that the expected rise in inflation may not be temporary and that the Fed is at risk of ‘overcooking’. “
The yield on US 10-year bonds rose to its highest since early 2020 at 1.754% and was the last at 1.71%. If this is sustained, it would be the seventh week in a row with increases worth a whopping 64 basis points in total.
The drastic bearish steepness of the yield curve reflects the risk that the Fed is serious about keeping short-term interest rates low until inflation increases, and so longer-dated bonds must offer higher yields to compensate.
The latest BofA investor survey showed that rising inflation and the bonds’ taper tantrum had replaced COVID-19 as their main risk.
While economic growth, corporate earnings and equities were still very optimistic, respondents feared a sharp drop for equities should 10-year yields exceed 2%.
The jump in government bond yields gave some support to the US dollar, although analysts are concerned that faster economic growth in the US will also push the current account deficit to levels that will eventually drag the currency down.
For now, the dollar index had risen to 91,853 from a low of 91.30, to leave a little firmer this week.
It stabilized on the low-yielding yen at 108.91, just outside the recent 10-month high at 109.36. The euro fell back to USD 1.1914 after repeatedly failing to break the USD 1.1990 / 1.2000 resistance.
The increase in yields weighed on gold, which offers no fixed return, dropping it 0.2% to $ 1,731 an ounce.
Additional reporting by Elizabeth Dilts Marshall; Editing by Shri Navaratnam and Lincoln Feast.