Asian Stocks Retreat as Bond Selloff Spreads: Markets Wrap

(Bloomberg) — Stocks and bonds in Asia traded lower Wednesday as traders assessed the impact of the jump in US Treasury yields overnight and comments from a Federal Reserve speaker led to receding bets for Fed rate cuts.

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MSCI’s Asia Pacific Index fell for a second day, as shares from Hong Kong to Japan and Australia dropped. A selloff in Australian bonds deepened after inflation figures topped estimates, while Japanese benchmark yields hit their highest since 2011.

Treasuries steadied in Asia after falling on a pair of weak US note sales and ahead of the Fed’s favorite price gauge due later this week. China’s yuan slid to the lowest since November amid signs policymakers are letting the currency drop against a resilient dollar. Emerging Asian currencies, including South Korea’s won and Malaysia’s ringgit also weakened.

“The early reaction is to the higher rates in US, and resilient consumer confidence data out of US reinforcing risks of rates staying higher for longer,” said Xin-Yao Ng, investment director at Abrdn. “That’s generally negative for Asia since it supports a stronger dollar over Asian currency.”

The yen held near an almost 16-year low against the pound. The Japanese currency is sliding faster against the euro than the dollar as speculation grows that the European Central Bank will take it slow in cutting interest rates because inflation remains elevated.

Oil extended gains as another attack in the Red Sea added to heightened geopolitical tensions in the Middle East ahead of an OPEC+ meeting on the weekend. West Texas Intermediate climbed above $80 a barrel, while Brent futures advanced 0.4%.

“The surge in oil prices and the rise in bond yields both in the US and in Japan are likely to make for a softer start to today’s trading session in Asia,” said Tony Sycamore, market analyst at IG Australia in Sydney.

In the corporate news, Lenovo Group said it plans to sell $2 billion worth of zero-coupon convertible bonds to Saudi Arabia’s sovereign wealth fund, the latest Chinese company to seek capital through such an issue within a matter of days.

Fed Rates

As Wall Street returned from the holiday weekend, the “T+1” rule came into effect — making US equities settle in one day rather than two.

Investors also waded through remarks from Fed ‘s Kashkari, who said the central bank’s policy stance is restrictive, but officials haven’t entirely ruled out additional rate hikes.

Bond traders who are stuck in a waiting game over Fed rate policy may soon get some welcome support.

Starting on Wednesday, and for the first time since the early 2000s, the Treasury Department will launch a series of buybacks targeting seasoned and harder-to-trade debt. Then in June, the US central bank is set to begin tapering the pace of its balance-sheet unwind, known as quantitative tightening, or QT.

The Fed’s first-line inflation gauge is about to show some modest relief from stubborn price pressures, corroborating central bankers’ prudence about the timing of interest-rate cuts.

Economists expect the personal consumption expenditures price index minus food and energy — due on Friday — to rise 0.2% in April. That would mark the smallest advance so far this year for the measure, which provides a better snapshot of underlying inflation.

Swap contracts are currently pricing in around 30 basis points of Fed rate cuts for all of 2024 — which equates to one reduction as the Fed moves have historically been increments of 25 basis points.

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