SYDNEY (Reuters) – Asian stock markets weakened Friday as a spike in global bond yields soured sentiment toward expensive technology stocks, while a rush from overflowing positions in crude oil caused the biggest setback in months.
After a 7% overnight decline, Brent crude oil futures fell another 38 cents to $ 62.90 a barrel, while US crude oil lost 35 cents to $ 59.65. [O/R]
The retreat wiped out four weeks of profit in a single session and could end a five-month bull run.
Stocks were also choppy as a fall on Wall Street drove Japan’s Nikkei 0.7% and South Korea down 1%. MSCI’s widest index of Asia-Pacific stocks outside Japan, followed by a drop of 0.5%.
Nasdaq futures were up 0.1% after a sharp 3% drop overnight, while S&P 500 futures added 0.2%.
Markets are now bracing for the outcome of a Bank of Japan policy meeting where it is widely expected to ease control over bond yields and limit buying ETFs, tweaks aimed at making the stimulus package more sustainable.
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’. “
Yields on US 10-year notes peaked to their highest since early 2020 at 1.754% and were the last at 1.72%. 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 climbed to 91,855 from a low of 91.30 to leave it a little firmer for the week.
It also pushed up on the low yielding yen to 109.01, 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 revenues weighed on gold, which offers no fixed return, and remained stable at $ 1,732 an ounce.
Additional reporting by Elizabeth Dilts Marshall; Editing by Shri Navaratnam