Asian shares drop as bond yields rise as investors weigh Fed risks

Early European markets also weaker, but oil rises to seven-year high

Photograph: iStock

Photograph: iStock

 

Asia’s share markets turned negative on Tuesday as two-year US Treasury yields topped 1 per cent for the first time in almost two years with investors weighing the risks of a Fed policy rate rise as soon as March.

Early European markets on Tuesday were also slightly weaker.

However, oil prices rose to their highest level in more than seven years over concerns about supply shocks after Yemen’s Houthi group attacked the United Arab Emirates.

MSCI’s broadest index of Asia-Pacific shares outside Japan edged higher earlier in the session as much as 0.4 per cent, before turning down 0.45 per cent in the afternoon.

Each of the region’s major markets, apart from some Chinese indexes, gave up their earlier gains.

Australian shares fell 0.11 per cent, while in China the blue chip CSI300 Index bucked the trend to stand 0.7 per cent higher.

Hong Kong’s Hang Seng Index swung from a 0.6 per cent gain to trade down 0.42 per cent.

Japan’s Nikkei dropped 0.23 per cent.

Sentiment

The turn in sentiment came after two-year US Treasury yields, a bellwether for rate expectations, rose above 1 per cent for the first time since February 2020. The yields stood at 1.0364 per cent in the Asia afternoon.

Benchmark 10-year yields gained nearly 6 basis points (bps) to 1.855 per cent.

In early European stock trading, the pan-region Euro Stoxx 50 futures slid 0.38 per cent to 4,276.5, German DAX futures fell 0.22 per cent to 15,893 and FTSE futures were off 0.17 per cent at 7,538.5.

US stock futures, the S&P 500 e-minis, were down 0.47 per cent at 4,633 per cent. The US Federal Reserve is not expected to change rates at its January 25-26th meeting but a growing number of investors think March will be the start of a tightening cycle.

“Investors’ focus remains on the Fed and the pace at which they raise rates,” John Milroy, adviser at brokerage Ord Minnett in Sydney, told Reuters.

“We think it will be faster than markets currently expect. Boom conditions remain in the US with a tight labour market. Good for world growth but adds to the inflationary pressures.”

Elizabeth Tian, Citigroup’s equity derivatives director, said equities markets were reacting to the bond market moves.

“There are fears there are more aggressive and quicker rate hikes by the Fed coming,” she said.

“The Fed is turning more hawkish and there is a lot of focus on that, but we think in the short-term equities market there should be more support because of the value of central bank liquidity that exists now,” she said.

“We’re saying it’s too early because of the liquidity to be too bearish and it should be more of selling into the rally.”

The dollar index, which tracks the greenback against a basket of currencies of major trading partners, was up at 95.33.

Brent crude rose to $87.33 per barrel, up 1 per cent and just off a peak hit earlier in the day of $87.55, the highest price since October 2014. US crude ticked up 1.32 per cent to $84.93 a barrel.

An air strike killed about 14 people in a building in the Yemeni capital of Sanaa, residents said on Tuesday, during strikes across the city launched by the Saudi-led coalition fighting the Houthi group.

The alliance strikes on Houthi-held Sanaa followed an attack claimed by the Iran-aligned Houthis on Monday on coalition partner the United Arab Emirates, in Abu Dhabi, in which three people were killed.

The “new geopolitical tension added to ongoing signs of tightness across the market,” ANZ Research analysts said in a note.

Gold was slightly lower. Spot gold traded at $1,817.1642 per ounce. – Reuters