Asian stocks sank on U.S. rate worries, dollar ascendant

Reuters: Asian stocks sank on Thursday, extending global equity declines after new signs of sustained inflationary pressures in the United States boosted the case for elevated interest rates for longer.

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GLOBAL MARKETS: ASIAN STOCKS SANK

The U.S. dollar hung close to the highest since mid-March against major peers, and touched a fresh 10-month top to the yen. Long-term Treasury yields hovered near two-week highs near 4.3%. Brent crude stayed above $90 amid tightening supply, adding to inflation worries. MSCI’s broadest index of Asia-Pacific shares slid 0.45%, following declines on Wall Street and in Europe.

Hong Kong’s Hang Seng dropped nearly 1%. Mainland Chinese blue chips sank 0.8%. Australia’s benchmark lost 1.1%. Japan’s Nikkei sagged a milder 0.2%, although that put it at risk of snapping an eight-session win streak. U.S. stock futures pointed to a 0.1% decline, following a 0.7% slide for the S&P 500 overnight. Wall Street stocks sold off after U.S. data showed the services sector unexpectedly picked up steam in August, suggesting stubborn inflationary forces.

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While traders are still fairly certain the Federal Reserve will forego a rate hike this month, they put the risk of one by year-end at closer to a coin toss. A rate cut is not expected until June. “The data doesn’t flip the script, but it shows the war against inflation hasn’t been won,” said Kyle Rodda, senior financial markets analyst at Capital.com in Melbourne. “It all goes back to the discussion of where that magical neutral rate happens to be,” he said. “While the markets are still feeling around for where that rate may be, it’s going to weigh on equities and support the U.S. dollar.”

The dollar index – which measures the currency against six developed-market peers, including the yen and euro – was flat at 104.85 after jumping to the highest since March 15 on Wednesday at 105.03. The dollar earlier touched the highest since Nov. 4 versus the yen at 147.875. The currency pair tends to move in step with long-term Treasury yields, which stood at 4.29% on Thursday after pushing to the highest since Aug. 23 at 4.306% in the previous session. The euro, meanwhile, was little changed at $1.0724, following its dip to a three-month trough of $1.0703 on Wednesday.

Elsewhere, the People’s Bank of China continued its bid to shore up the yuan by again setting strong official midpoints for the currency. Despite those efforts, the yuan continues to hover on the weaker side of the closely watched 7.3 per dollar level in offshore trading, last changing hands at 7.3274. It sank to the lowest since early November at 7.3490 in the middle of last month, undercut by a rapidly deteriorating property sector and the risk of spillover into broader markets. China trade data released Thursday, while not as dire as economists predicted, still showed a nearly 9% slide in exports and a more than 7% drop for imports.

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The Australian dollar, which often trades as a proxy for its top trading partner, eased 0.2% to $0.6371, keeping it close to this week’s 10-month low. Crude continued its steady climb of the past two weeks, edging higher amid expectations of a fall in U.S. inventories, after Saudi Arabia and Russia earlier this week extended voluntary supply cuts to year-end. Brent crude futures edged up 12 cents to $90.72 a barrel, while U.S. West Texas Intermediate crude futures gained 11 cents to $87.65.

U.S. DOLLAR

Reuters: A buoyant dollar pushed the yen to a 10-month trough on Thursday and kept the euro and sterling pinned near three-month lows, as investors placed their faith in a still-resilient U.S. economy even amid a dour global growth outlook. A less-than-expected fall in China’s exports and imports numbers in August did little to lift investors’ spirits, as they remain on the lookout for further support measures from Beijing to shore up the economy and revive market confidence. The greenback scaled a fresh top of 147.875 yen in early Asia trade, its highest since last November.

Against a basket of currencies, the dollar steadied at 104.82, holding on to some of its gains from the previous session after scaling a six-month peak as the U.S. services sector unexpectedly gained steam in August. The stronger-than-expected data pushed the euro to its lowest since June at $1.0703 on Wednesday, though it reversed some of those losses to last trade at $1.07295. Sterling slipped 0.06% to $1.2500, having also bottomed at a three-month trough of $1.24835 in the previous session.

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“It certainly was a good ISM so those thinking of a U.S. recession in the near term might be a little bit disappointed,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia. “However, the Beige Book wasn’t that great, actually.” U.S. economic growth was “modest” in recent weeks, job growth was “subdued,” and inflation slowed in most parts of the country, the Federal Reserve report published on Wednesday showed. “I think that what’s really driving the dollar is not so much that the U.S. economy is doing great, but it’s doing better than elsewhere.”

Market pricing shows a near 47% chance that the Fed might deliver another rate hike in November, according to the CME FedWatch tool, though expectations are for policymakers to keep rates on hold later this month. Conversely, Bank of England Governor Andrew Bailey said on Wednesday that the central bank is “much nearer” to the end of its rate-hike cycle, though borrowing costs might still have further to rise because of stubborn inflation pressures.

On the same day, European Central Bank policymakers warned investors that the decision for a rate increase next week was still up in the air, but a rise in borrowing costs was among the options on the table. “It was surprising to see those dovish comments from Governor Bailey that certainly does make us comfortable that they’re only going to hike twice more,” Capurso said, referring to the BoE. “As for the ECB, what we’re noticing is that there’s a real divergence happening between various ECB members, and that to me is suggesting that at most you get one more rate hike out of the ECB.”

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BRITISH POUND

Reuters: Sterling was slumped near a three-month low against a resurgent dollar on Wednesday and also lost ground on the euro, as global growth jitters, high energy prices, and higher U.S. yields remained supportive of the greenback. The pound was last a touch lower against the dollar at $1.2556 having shed 0.5% a day earlier, when it touched its lowest since mid June. It is already down nearly 1% in September. The British currency’s decline was in line with broader moves. The dollar index, which tracks the unit against six major peers including the pound, rose 0.65% on Tuesday – its biggest daily gain since March – on the back of data showing weak Chinese and European economies versus a comparatively resilient United States, and higher oil prices.

The pound was the best performing major developed market currency against the dollar in the first half of the year, with better than feared British economic data and sticky inflation driving expectations that the Bank of England would keep raising rates longer than most other peers. “The pound has been in a period of consolidation after a strong rally on the back of rate hike expectations which peaked at around 6% and since then have been pared back,” said Lee Hardman senior currency analyst at MUFG.

He said the latest driver for the lower expectations for a peak BoE rate was recent comments from BoE chief economist Huw Pill that the central bank will keep rates higher for longer, rather than continue to raise aggressively. A further 25 basis point bank rate increase to 5.5% at the BoE’s next meeting later this month is nearly priced in. Markets also expect a further 25 basis point hike in this cycle, though the timing of that is uncertain.

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The pound was also weaker against the euro, which rose 0.28% to 85.6 pence, and the Japanese yen. The pound fell 0.3% 185.07 yen, after Japan’s top currency diplomat gave his strongest warning since mid-August about intervention to support the weak yen. The pound, last week, hit its highest since 2015 against the yen.

SOUTH AFRICAN RAND

Reuters: The South African rand weakened on Wednesday, as the country continued to be battered by its worst rolling blackouts on record and as markets moved away from riskier assets. At 1110 GMT, the rand traded at 19.2575 against the dollar, 0.3% weaker than its previous close. The dollar last traded around 0.09% weaker against a basket of global currencies. “The rand has struggled for any traction through the first half of the week,” said Danny Greeff of ETM Analytics, as sentiment towards riskier currencies like the rand soured. “Simultaneously, there is very little in the way of positive news flow out of South Africa for investors to focus on.”

South Africa’s struggling state utility Eskom reinstated the worst rolling blackouts on record, which mean up to 12 hours of power cuts for most households per day. Adding fuel to the fire, petrol and diesel prices were also hiked on Wednesday, hurting Africa’s most industrialised economy. This exacerbates the country’s fiscal crisis and deters investment in the rand and government bonds, Greeff added.

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On the Johannesburg Stock Exchange, the blue-chip Top-40 and the broader all-share indexes were both last trading over 0.9% weaker. South Africa’s benchmark 2030 government bond was stronger, with the yield down 4 basis points to 10.370%.