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Sunday, May 19, 2024

Asian Market Calm as Fed Disappointment Rattles Bond Sector

Asian markets stabilized on Wednesday following a recent downturn, although investor caution prevailed after the world’s leading central banker shifted stance on U.S. rate cuts for the year, leading Treasury yields to reach their highest levels in five months.

In Europe, a subdued start is expected as EUROSTOXX 50 futures remain unchanged. Meanwhile, U.S. stock futures dipped by 0.1% following a lower close on Wall Street. The dollar’s unexpected strength this year is causing unease in Asian currency markets, with the yen hitting new 34-year lows regularly, the Chinese yuan hovering near five-month lows, and Vietnam’s dong reaching record lows.

The New Zealand dollar gained 0.4% to $0.5902 after first-quarter inflation data showed domestically driven price pressures were surprisingly strong, adding to signs that the last mile to get inflation back to target could be bumpy.

On Wednesday, MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS), opens new tab rose 0.1%, after plunging more than 4% in the past three sessions. Japan’s Nikkei (.N225), opens new tab, however, dropped 0.8% to the lowest in two months.

Taiwanese shares (.TWII), opens new tab outperformed with a gain of 1.6%, as the chip-making giant Taiwan Semiconductor Manufacturing Co (2330.TW), opens new tab rose 2% ahead of its earnings results. Shanghai Composite index (.SSEC), opens new tab gained 1.2% after the securities regulator clarified the new listing rules to calm the recent market panic.

Fed Chair Jerome Powell said recent inflation data, with three months of upside surprises, had not given policymakers enough confidence to ease policy soon. He noted the central bank may need to keep rates higher for longer than previously thought.

Markets have already slashed the amount of easing expected this year to fewer than two rate cuts, a sea change from about six cuts predicted at the beginning of the year. The first rate cut is still expected in September, although the market’s confidence in that has declined.

Two-year Treasury yields retested 5% overnight and were last at 4.9855%, while 10-years held near a five-month high at 4.6655% on diminishing expectations of Federal Reserve policy easing this year.

“Now Chair Powell has caved. Surprising in fact that we’ve not had a bigger reaction. But we think that’s coming, or at least part of a process that will ultimately see the 10-year back in the 5% area,” said Benjamin Schroeder, a senior rates strategist at ING, referring to U.S. Treasuries.

“Given what we have seen so far from the inflation data, the market would be excused had it decided to downsize the discount for a September cut in a more dramatic fashion.”

The International Monetary Fund said on Tuesday the global economy is set for another year of slow but steady growth, with U.S. strength pushing world output through headwinds from lingering high inflation, weak demand in China and Europe and spillovers from two regional wars.

Geopolitical tensions in the Middle East are still running high. Israel vowed to respond to Iran’s weekend attack despite international calls for restraint, although its war cabinet put off a meeting to decide on its response until Wednesday.

In currencies, the dollar index (.DXY), opens new tab measuring the greenback against its major peers was buoyant near a 5-1/2-month high at 106.39. The beleaguered yen was last steady at 154.62 per dollar as the risk of government intervention loomed, although so far there has been no action from Tokyo apart from verbal warnings.

Asian bonds extended the sell-off in Treasuries. The 10-year Australian government bond yield rose 5 basis points to 4.371%, the highest this year.

In commodities, oil prices slipped on Wednesday as demand concerns outweighed heightened tension in the Middle East. Brent futures fell 0.5% to $89.53 a barrel, while U.S. crude dropped 0.7% to $84.81 a barrel.

Gold prices eased 0.2% to $2,376.79 per ounce, slipping away from a record high of $2,431.29.

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