Asian stocks experienced significant losses on Thursday, while bond prices decreased due to expectations that global interest rates would remain higher for a longer period. Investors are closely watching upcoming inflation readings to gain insight into future monetary policy decisions.
The U.S. dollar strengthened alongside rising U.S. Treasury yields, while gold continued to face downward pressure as the possibility of a rate cut by the Federal Reserve diminished.
The recent decline in global risk sentiment can be attributed to data indicating persistent inflationary pressures in major economies. Vishnu Varathan, the chief economist for Asia ex-Japan at Mizuho Bank, stated that asset markets have been impacted by unexpectedly high global inflation, leading to declines in equities and bond prices, and boosting the strength of the U.S. dollar.
MSCI’s broadest index of Asia-Pacific shares, excluding Japan, fell by 0.5%, following the negative performance of Wall Street and extending the previous session’s 1.6% decline.
The Nikkei in Japan experienced a significant drop of over 1.5%, mirroring the decline in U.S. and European futures. EUROSTOXX 50 futures saw a slight decrease of 0.18%, while S&P 500 futures dipped by 0.35%. Nasdaq futures also slumped, experiencing a 0.45% decline.
In terms of economic activity, a recent Fed survey revealed that the U.S. economy continued to expand between early April and mid-May. However, businesses expressed more pessimism about the future, and inflation increased at a moderate pace.
Meanwhile, data from Germany indicated that inflation surpassed expectations, rising to 2.8% in May. This precedes the broader euro zone bloc’s reading, which will be released on Friday.
The most significant event for the market this week is the release of the U.S. core personal consumption expenditures (PCE) price index report on Friday. This report is the Federal Reserve’s preferred measure of inflation, and analysts anticipate it will remain stable on a monthly basis.
Matt Simpson, senior market analyst at City Index, expressed skepticism about the possibility of a softer-than-expected PCE report on Friday, considering the data that has led to this point.
Simpson stated, “From this perspective, if the PCE does not increase significantly, it could be a pleasant surprise. However, if it does rise further from sticky levels, risk appetite will take a beating.”
Meanwhile, U.S. Treasury yields remained high on Thursday, partly due to a weak debt auction the previous day. The benchmark 10-year yield stood at 4.6197%, while the two-year yield stabilized at 4.9830%.
It is worth noting that bond prices move in the opposite direction to yields.
Similarly, Japanese government bond (JGB) yields reached new multi-year highs, as expectations grew for further rate hikes from the Bank of Japan.
The 10-year JGB yield reached 1.1% in early Asia trade, the highest level since July 2011.
In Asia, Chinese blue chips saw a slight decline of 0.25%, following the trend of other regional markets, despite the International Monetary Fund’s positive revision of China’s GDP growth forecasts for 2024 and 2025.
Meanwhile, Hong Kong’s Hang Seng Index managed to gain 0.17%.
In the currency market, the dollar remained strong, causing the euro to fall to a more than two-week low of $1.07955.
The yen also weakened, reaching a four-week low of 157.715 against the dollar before settling at 157.43.
The Australian dollar saw a slight increase of 0.1% to $0.6617, following a brief boost in the previous session due to unexpectedly higher domestic inflation in April.
According to Rob Carnell, ING’s regional head of research for Asia Pacific, the inflation report was not what the Reserve Bank of Australia had hoped for.
Oil prices experienced a slight rise, recovering some of the losses from Wednesday, as concerns about weak U.S. gasoline demand and prolonged higher interest rates lingered.
The price of Brent crude remained stable at $83.60 per barrel, while U.S. crude saw a slight increase of 0.03% to reach $79.25 a barrel. In the commodities market, spot gold experienced a 0.2% decline, reaching $2,334.15 per ounce.