Asian stocks retreated as investors weighed unexpectedly strong US services data which fueled bets for a higher Federal Reserve terminal rate.
A gauge of regional stocks headed for its lowest close in almost a week, with almost all sectors posting a drop. US futures trimmed an earlier advance following a third day of declines for the S&P 500 on Monday.
Treasury yields were steady in Asian trading after surging Monday. The dollar was little changed.
Australia’s central bank raised its key interest rate by 25 basis points as expected while giving itself flexibility for future decisions. The yield on Australia’s three-year government bond rose and the Australian dollar extended its advance.
The yen reversed gains after the Bank of Japan reiterated its dovish policy stance. The offshore yuan remained below 7 to the greenback.
Swaps showed an increase in expectations for where the Fed terminal rate will be, with the market indicating a peak above 5% in the middle of 2023. The current benchmark sits in a range between 3.75% and 4%.
“We would argue that the potential for a higher terminal rate remains,” Goldman Sachs Group Inc. strategists, including Cecilia Mariotti, wrote in a note. That’s even after Fed Chair Jerome Powell last week indicated the likelihood of a step down in the size of its rate hikes at this month’s policy meeting.
“Our economists expect Fed Funds rates to peak at around 5-5.25%; a stronger US economy might translate into further pressure on risky assets near-term due to upward pressure on rates,” they wrote.
Meanwhile, Beijing announced it will scrap Covid testing requirements for most public venues in what is seen as an accelerated move toward the exit of Covid Zero policy. But the possibility of new tariffs on Chinese steel and aluminum by the US and European Union may weigh on sentiment.
“I wouldn’t be surprised if despite the selloff in the US, today Chinese markets still hold up because there seems to be signs of decoupling,” Pooja Malik, a partner at Nipun Capital, said on Bloomberg Television.
Oil was up for the first time in three days on optimism that China’s reopening will buoy demand. Gold climbed.
Elsewhere, a majority of 291 respondents to the latest MLIV Pulse survey said leveraged loans would be the canary in the coal mine to indicate that corporate credit quality is getting worse.
About 28% of survey respondents expect defaults to jump significantly if US rates peak at or below 5%, which is about where the market bets the Fed will stop hiking. Another 63% see defaults surging if rates peak above 5%.
Key events this week:
- US trade, Tuesday
- EIA crude oil inventory report, Wednesday
- Euro zone GDP, Wednesday
- US MBA mortgage applications, Wednesday
- ECB President Christine Lagarde speaks, Thursday
- US initial jobless claims, Thursday
- US PPI, wholesale inventories, University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
- S&P 500 futures were little changed as of 1:57 p.m. Tokyo time. S&P 500 fell 1.8%
- Nasdaq 100 futures were little changed. Nasdaq 100 fell 1.7%
- Japan’s Topix index rose 0.2%
- South Korea’s Kospi index fell 0.7%
- Hong Kong’s Hang Seng Index fell 0.9%
- China’s Shanghai Composite Index was little changed
- Australia’s S&P/ASX 200 Index fell 0.4%
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.0493
- The Japanese yen was little changed at 136.86 per dollar
- The offshore yuan was little changed at 6.9709 per dollar
- Bitcoin rose 0.2% to $17,009.32
- Ether rose 0.2% to $1,261.5
- The yield on 10-year Treasuries advanced one basis point to 3.58%
- Australia’s 10-year yield advanced three basis points to 3.40%
- West Texas Intermediate crude rose 0.5% to $77.30 a barrel
- Spot gold rose 0.2% to $1 772.99 an ounce
This story was produced with the assistance of Bloomberg Automation.
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