Treasury yields pushed higher, the dollar extended gains and European stock futures fell with Asian shares as hawkish rhetoric from Federal Reserve Chair Jerome Powell hurt global appetite for risk taking.
(Bloomberg) — Treasury yields pushed higher, the dollar extended gains and European stock futures fell with Asian shares as hawkish rhetoric from Federal Reserve Chair Jerome Powell hurt global appetite for risk taking.
A gauge of Asian equities slipped more than 1% Wednesday, with a benchmark of emerging markets falling more as investors adjusted for the prospect of higher borrowing costs. Contracts for Euro Stoxx 50 declined 0.2% while those for US benchmarks were marginally lower after the S&P 500 lost the most in two weeks.
Some of the heaviest losses were in Hong Kong, where the Hang Seng Index declined more than 2% amid signs that derivatives and structured products were amplifying falls. Shares of Asian energy companies and miners dropped as a combination of the Fed outlook and China’s modest economic growth target weighed on commodities.
A measure of greenback strength extended its recent rally to near the highest level this year. The yen continued to weaken, the yuan traded just below the key level of 7 versus the dollar and the currencies of Australia and New Zealand held large losses from the previous session.
Powell, who will appear in Congress again later in the day, signaled during Senate testimony on Tuesday that officials were ready to speed up the pace of tightening and take rates to higher levels if inflation remains hot. That’s sent short-end yields skyrocketing and prompted a shift higher in rate-hike bets.
The two-year Treasury yield rose as high as 5.08% in Asia as it hovered at levels last seen in mid 2007. The rate has now surpassed its 10-year equivalent by a full percentage point for the first time since 1981. This is playing out in a deeply inverted yield curve — a potential harbinger of recession.
Read more: Deepest Bond Yield Inversion Since Volcker Suggests Hard Landing
Australia’s 10-year bond yield rose six basis points to 3.74% while the more policy-sensitive three-year maturity climbed nine basis points to 3.47%. That’s even as Reserve Bank of Australia Governor Philip Lowe said the point is drawing closer for a pause in the nation’s tightening cycle.
In the swaps market, traders boosted wagers for the Fed’s March 22 meeting, with an increase in bets for a half-point hike and a peak above 5.6% by September. The Fed raised its policy rate by a quarter point to a range of 4.5% to 4.75% in February.
“A 6% terminal rate is not out of the question now,” said Kellie Wood, deputy head of fixed income at Schroders Plc in Australia. “Expect to see a broad-based selloff in Aussie and Asian markets today led by the short end but with US rates underperforming.”
Read more: Global Investors Contemplate Fallout From US Rates Reaching 6%
US policymakers will have a chance to review the February jobs data and an update on consumer prices before they meet again. US payroll growth has topped estimates for 10 straight months in the longest streak in decades, a trend that, if extended, will boost pressure on the Fed to keep raising interest rates.
Elsewhere in markets, oil held a deep loss from Tuesday as the outlook for rate hikes raised concerns over a drag on demand. Gold was little changed after falling to the lowest in a week in response to Powell. Iron ore dipped as investors weighed data that suggests China’s steel consumption remains slow.
Key events this week:
- Euro area GDP, Wednesday
- US MBA mortgage applications, ADP employment change, trade balance, JOLTS job openings, Wednesday
- Fed Chair Powell’s semiannual Monetary Policy Report to the House Financial Services Committee, Wednesday
- Canada rate decision, Wednesday
- EIA crude oil inventories, Wednesday
- China CPI, PPI, Thursday
- US Challenger job cuts, initial jobless claims, household change in net worth, Thursday
- Bank of Japan policy rate decision, Friday
- US nonfarm payrolls, unemployment rate, monthly budget statement, Friday
Some of the main moves in markets:
Stocks
- S&P 500 futures were little changed as of 6:35 a.m. London time. The S&P 500 fell 1.5% on Tuesday
- Nasdaq 100 futures fell 0.1%. The Nasdaq 100 fell 1.2%
- Euro Stoxx 50 futures fell 0.2%
- Australia’s S&P/ASX 200 Index fell 0.8%
- Japan’s Topix rose 0.3%
- Hong Kong’s Hang Seng fell 2.2%
- The Shanghai Composite fell 0.3%
Currencies
- The Bloomberg Dollar Spot Index rose 0.2%
- The euro fell 0.1% to $1.0536
- The Japanese yen fell 0.4% to 137.67 per dollar
- The offshore yuan rose 0.2% to 6.9771 per dollar
- The Australian dollar rose 0.2% to $0.6594
- The British pound was little changed at $1.1825
Cryptocurrencies
- Bitcoin was little changed at $22,036.28
- Ether rose 0.3% to $1,554.91
Bonds
- The yield on 10-year Treasuries advanced three basis points to 4.00%
- Japan’s 10-year yield was little changed at 0.50%
- Australia’s 10-year yield advanced six basis points to 3.74%
Commodities
- West Texas Intermediate crude was little changed
- Spot gold was little changed
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Rita Nazareth, Georgina Mckay, Stephen Kirkland, Richard Henderson and Sofia Horta e Costa.
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