Asian shares hit 11-month low on Middle East anxiety, surging yields

Reuters: Asian shares hit 11-month low on Friday as fears of a regional conflict in the Middle East intensified and as a relentless rise in long-term U.S. yields pressured valuations, while supply concerns lifted oil prices further.

GLOBAL MARKETS: ASIAN SHARES HIT 11-MONTH LOW

The surge in the 10-year U.S. benchmark yield overnight to 5% has raised borrowing costs around the world. On Friday, the Bank of Japan intervened in the Japanese government bond market as the 10-year JGB yield touched a decade high. A much-watched speech overnight from Federal Reserve Chair Jerome Powell led to a choppy market response, although most investors leaned further into bets that the Fed will extend its rate pause in November.

MSCI’s broadest index of Asia-Pacific shares outside Japan skidded 0.8% to a fresh low since November last year, bringing the weekly loss to a sizeable 3%. Tokyo’s Nikkei fell 1% and was down 3.6% for the week. China’s blue chips fell 0.4%, while Hong Kong’s Hang Seng index slumped 1%. China on Friday held its benchmark lending rates steady as the economy showed signs of stabilisation. Sentiment is also fragile after Tesla shares dropped 9% after its quarterly results disappointed, with a warning about consumer demand from Elon Musk sparking a sell off in EV stocks.

On the geopolitical front, fears of a spreading regional conflict are rising after the U.S. intercepted three cruise missiles and several drones launched by the Iran-aligned Houthi movement from Yemen potentially toward Israel. U.S. President Joe Biden in a speech on Thursday asked Americans to spend billions more dollars to help Israel fight Hamas, as an expected ground invasion with the aim of annihilating Hamas nears. “World leaders continue to trek to the Middle East to – if nothing else — delay the onset of any further hostility,” said Kyle Rodda, senior financial market analyst at capital.com. “The markets are shuffling nervously as they await a move: gold and oil, as the most apparent indicators of sentiment towards the conflict, continue to rise.”

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Gold prices scaled a fresh two-month peak of $1982.09 per ounce, the highest since late July, as investors sought safe-haven assets in the turmoil. Oil prices are headed for the second weekly gain on supply fears from an escalating regional conflict in the Middle East. U.S. crude jumped 1% to $90.33 per barrel and Brent was at $93.2, up 0.8% on the day. Overnight, Fed chair Powell appeared to align himself with Fed colleagues who have recently said the bond market is now doing some of the central bank’s work for it.

However, Powell walked a narrow line in his remarks, leaving open the possible need for more rate hikes because the economy had proved stronger than expected, but also noting emerging risks and a need to move with care. The U.S. dollar was within a hair’s breadth of the closely watched 150 yen level on Friday. It was up 0.1% against its peers at 106.34, not too far from an 11-month top of 107.34 hit in early this month. The 10-year’s yield has since steadied at 4.9620% in Asia, after hitting the 5.0% mark for the first since 2007, as investors grappled with U.S. economic resilience, concerns about the increase in U.S. debt issuance, and interest rates remaining high for longer

It was up 35 basis points this week, its biggest weekly rise in over a decade. Quincy Krosby, chief global strategist at LPL Financial, said the focus on supply has become a fixation for the treasury market, and the concern is that the U.S. deficit is poised to climb higher because of the larger defence funding needs for Washington. “Now we’re talking about not just the Ukraine-Russia conflict, that front, but now you have another front, that’s in the Middle East that has to be satisfied… The U.S. is going to need more and more supply in terms of what we auction to pay for all of this.”

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BRITISH POUND

Reuters: Sterling fell on Wednesday as traders stayed risk-averse and continued to digest data from Tuesday showing UK inflation unexpectedly held at 6.7% in September, raising the possibility of another rise in interest rates. At 0851 GMT, sterling was down 0.3% against the dollar to $1.2106, and fell by the same degree against the euro at 87.03 pence. “Sterling has been trading with its typical high beta to global risk conditions in recent days,” said Nicholas Rees, FX market analyst at Monex Europe, with concerns around a potential energy price spike resulting from the crisis in the Middle East putting the pound under pressure again this morning. The market is also waiting with bated breath for remarks from Federal Reserve Chair Jerome Powell at 1600 GMT.

“Sterling is falling for a third straight day on dollar strength owing to haven flows, and as U.S. Treasury yields hit a 16-year high, the expectation is that the Federal Reserve will keep interest rates higher for longer,” said Fiona Cincotta, senior financial markets analyst at City Index. Domestically, traders are still poring over Monday’s wage data and Tuesday’s inflation numbers. The hotter-than-expected consumer price print followed data showing that growth in British workers’ regular pay slowed from a previous record high and job vacancies also declined.

Signs of a softer labour market boosted the chance the Bank of England will leave rates unchanged at its next meeting, while the inflation figures did the opposite. “The modest undershoot on the wages data contrasted with a slight beat on inflation,” said Monex’s Rees. “All-in-all though, both show signs of slowing inflationary pressures and with BoE speakers having recently set a high bar for restarting rate hike in our view, we don’t think this round of data moves the needle for either the MPC of the pound.” Money markets are placing an 82% chance that the BoE will hold rates unchanged in its coming meeting in November. UK retail sales for September are due on Friday, while a preliminary read on October business activity lands next week.

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U.S. DOLLAR

Reuters: The dollar was within a hair’s breadth of the closely watched 150 yen level on Friday, buoyed by a surge in the U.S. 10-year Treasury yield which briefly reached 5% overnight for the first time since 2007. The benchmark 10-year yield, which was last at 4.9456%, has climbed more than 30 basis points this week, driven by rising expectations that the Federal Reserve is likely to keep interest rates higher for longer and by mounting U.S. fiscal concerns. “The move up has been driven by the Fed leaving the market as a price insensitive buyer. Foreign demand has also waned. Combined with surprisingly large issuance from the deficit, it’s a classic supply and demand effect,” said Brian Jacobsen, chief economist at Annex Wealth Management.

That kept pressure on the yen, which last bought 149.85 per dollar, not far from the psychological threshold of 150 per dollar which some traders bet could trigger an intervention from Japanese authorities, as happened last year. The dollar/yen pair tends to closely track changes in long-term Treasury yields, particularly in the 10-year maturity. Sterling was likewise 0.03% lower at $1.2135, though was some distance away from its two-week low of $1.2093 hit on Thursday. In the broader currency market, the U.S. dollar edged higher, supported by elevated Treasury yields. The dollar index gained 0.07% to 106.28, though was on track for a weekly loss of about 0.3%.

At a closely-watched speech on Thursday, Fed Chair Jerome Powell said the strength of the U.S. economy and continued tight labour markets could require still tougher borrowing conditions to control inflation, though he added rising market interest rates could reduce the need for the central bank to act. “The market seems to be more comfortable with the view that the Fed is going to pause, or at least pass on a rate rise out of the Oct. 31-Nov. 1 meeting,” said Ray Attrill, head of FX strategy at National Australia Bank. “Obviously, he’s still not shutting the door to the prospect of higher rates, but there were a few words in Powell’s speech that I do think represent a little bit of a softening in the tone.”

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Money markets are almost fully expecting the Fed to keep interest rates on hold at its upcoming policy meeting, compared to a roughly 94% chance a week ago, according to the CME FedWatch tool. Elsewhere, the euro eased 0.06% to $1.0575, while the Australian dollar lost 0.21% to last stand at $0.63155. The New Zealand dollar edged 0.35% lower to $0.5829, after having slid to an over 11-month low of $0.5816 on Thursday. The kiwi was on track for a weekly loss of nearly 1%, further pressured by data earlier this week which showed New Zealand’s consumer inflation slowed to a two-year low in the third quarter.

In Asia, data on Friday showed Japan’s core inflation in September slowed below the 3% threshold for the first time in over a year but stayed above the central bank’s 2% target, though that did little to move the yen. China, meanwhile, kept its benchmark lending rates unchanged at the monthly fixing on Friday, matching market expectations, amid signs that parts of the wobbly economy may be slowly getting back on better footing. “I do expect some more monetary easing going forward, specifically before year end,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “Even though we got that stronger-than-expected data dump and GDP earlier in the week, I think underneath the surface, the Chinese economy is still pretty fragile.”

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SOUTH AFRICAN RAND

Reuters: The South African rand was weaker in early trade on Thursday on soaring U.S. Treasury yields ahead of a speech by Federal Reserve Chair Jerome Powell. At 0733 GMT, the rand traded at 19.0775 against the dollar, about 0.5% weaker than its previous close. U.S. Treasury yields hit 16-year highs on Wednesday, boosted by expectations that the Fed would keep interest rates higher for longer. “If yields continue to rise, the USD will eventually run stronger,” said Rand Merchant Bank analysts in a morning briefing.

The rand often takes its cues from global factors such as U.S. monetary policy in addition to local factors. “The rate hike concerns and heightened Middle East tensions are driving the dollar stronger and dampening risk sentiment,” said Andre Cilliers, currency strategist at TreasuryONE. “Poor local retail sales data also did not help the rand’s cause,” Cilliers added.

Global markets will turn their attention to a speech by Powell later in the day for hints on the future interest rate path of the world’s biggest economy. Shares on the Johannesburg Stock Exchange opened lower, with the blue-chip Top-40 index down about 0.9%. South Africa’s benchmark 2030 government bond was weaker in early deals, with the yield up 13.5 basis points to 10.960%.

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Published by the Mercury Team on 20 October 2023

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