Asian stocks and bonds fell amid a broad sell-off on Wall Street, while the yen strengthened after Japan warned of possible currency intervention.
Stock indexes in Japan, Hong Kong and Australia fell after the biggest drop in U.S. stocks in more than two years, with the S&P 500 down more than 4% and the Nasdaq 100 down more than 5%. European stock futures fell, while US contracts rose.
The yen retreated from a fall to a key level of 145 against the dollar after the finance minister warned that Japan would not rule out any response if current trends persisted. The country’s 10-year bond yield rose to 0.25%, the upper end of the central bank’s policy range.
Stronger-than-expected U.S. inflation readings, which sent stocks lower, led swaps traders to bet the Federal Reserve would raise interest rates by three-quarters of a percentage point next week, with some looking at a full point hike. That has investors weighing the prospect of tighter conditions in many markets after they returned to risk-sensitive assets in recent days on hopes that inflation would cool further.
Two-year Treasury yields, the most sensitive to policy changes, were volatile in Asia after jumping 22 basis points, pushing it more than 30 basis points above the 10-year rate and deepening an inversion in what is typically warning of a recession. Australia’s benchmark 10-year bond yield jumped about 10 basis points.
“Markets have been trying desperately to make an optimistic case and fight the Fed, essentially, and that’s a dangerous place to be,” Carol Schleif, deputy chief investment officer at BMO Family Office, told Bloomberg TV. Looking ahead, she noted that “a lot of fiscal stimulus is on its way to the market to take some of the place of the monetary stimulus that is being phased out.”
The US consumer price index rose 0.1% from July after being flat the previous month, according to data from the Labor Department. Prices rose 8.3% year over year, a slight slowdown but still more than the average estimate of 8.1%. The so-called core CPI, which excludes the more volatile food and energy components, also beat forecasts.
The reversal in markets casts a dark shadow over the debate about the outlook for the global economy and markets. The latest survey by Bank of America Corp. showed that the number of investors anticipating a recession reached its highest level since May 2020.
The dollar spent most of the rally on the CPI report. The dollar’s strength weighed on Asian currencies, with the Korean won among the depreciators.
The Nikkei reported that the Bank of Japan conducted a so-called rate check on the foreign exchange market, which is considered a precursor to intervention.
The People’s Bank of China set the yuan’s daily reference rate at the steepest deviation from the median estimate in a Bloomberg survey of analysts and traders.
“Many emerging markets are feeling the heat of a strong US dollar,” said Chi Lo, senior market strategist for Asia-Pacific at BNP Paribas Asset Management, citing their greenback debt burden. “Only China can afford to resist this global trend of rising rates by maintaining a policy easing stance.”
Bitcoin endured a drop of more than 10% overnight, the biggest drop since the cryptocurrency crash in June.
Here are some key events to watch this week:
- UK CPI, Wednesday
- US PPI, Wednesday
- US Commercial Inventories, Manufacturing Empire, Retail Sales, Initial Jobless Claims, Industrial Production, Thursday
- China Home Sales, Retail Sales, Industrial Production, Fixed Assets, Survey Unemployment Rate, Friday
- Eurozone CPI, Friday
- US University of Michigan Consumer Sentiment, Friday
Some of the major movements in the markets are:
- S&P 500 futures rose 0.3% at 2:06 p.m. in Tokyo after the index fell 4.3%
- Nasdaq 100 futures rose 0.2%. Index down 5.5%
- Topix index down 1.9%
- Australia’s S&P/ASX 200 index fell 2.4%
- Hang Seng index down 2.4%
- The Shanghai Composite fell 1%
- Kospi lost 1.3%
- Euro Stoxx 50 futures down 0.7%
- The Bloomberg dollar spot index fluctuated
- The euro rose by 0.3% to 0.9995 per dollar
- The Japanese yen rose by 0.6% to 143.67 per dollar
- The offshore yuan rose 0.3% to 6.9649 per dollar
- The 10-year Treasury yield rose one basis point to 3.42%
- Australia’s 10-year bond yield rose 10 basis points to 3.67%
- West Texas Intermediate crude fell 0.6% to $86.77 a barrel
- Gold cost $1,703.47 per ounce
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