GLOBAL MARKETS-Asia shares cautious, bonds edgy after Fed warnings

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Asian stock markets: https://tmsnrt.rs/2zpUAr4

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Markets choppy after Fed warnings on rates

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Yield curve most inverted since 1981

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Dollar up from week’s lows, but with little conviction

by Wayne Cole

SYDNEY, Nov 18 (Reuters) – Asian shares were in a cautious mood on Friday after U.S.

Both the dollar and bond yields were pushed higher overnight when St. Lewis Fed President James Bullard said that interest rates may need to reach a range of 5% to 7% to be “restrictive enough” to curb inflation.

That was a blow to investors who had bet rates would peak at 5% and saw Fed fund futures sell off as markets priced in more chances that rates would now peak out at 5-5.25%, rather than 4.75-5.0%.

Two-year yields crept back to 4.46%, retracing a bit of last week’s sharp inflation-driven drop of 33 basis points to a low of 4.29%. That left them 69 basis points above 10-year yields, the biggest inversion since 1981.

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“The message is about the desire of the Fed to vote against what they would consider premature loosening of financial conditions,” said Brian Daingerfield, an analyst at NatWest Markets. “And on that front, message received.”

“The Fed seems squarely focused on over-signaling on the tightening front and hoping the data slows to a point where they can have the flexibility to undershoot.”

The bond market’s warnings of recession weren’t what Wall Street wanted to hear, and they left S&P 500 futures flat on Friday, while Nasdaq futures rose 0.1%.

EUROSTOXX 50 futures added 0.7% and FTSE futures 0.3%.

MSCI’s broadest index of Asia-Pacific shares outside Japan bounced 0.6%, after slipping for two sessions.

Chinese blue chips eased 0.1% amid reports that Beijing has asked banks to control liquidity in the bond market after soaring yields caused losses for some investors.

There were also concerns that a surge in COVID-19 cases in China would challenge plans to ease strict movement curbs that have crippled the economy.

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Not to turn

Japan’s Nikkei was up 0.2%. Data showed inflation running at a 40-year high as a weak yen stoked import costs.

Still, the Bank of Japan claims that inflation is mostly driven by energy costs outside of its control and that the economy needs to continue super-easy policies.

The situation was radically different in Britain, where Finance Minister Jeremy Hunt had just announced tax increases and spending cuts in an effort to reassure markets that the government was serious about fighting inflation.

Fearful predictions that the economy is already in recession, sterling stands at $1.1890, off the week’s high of $1.2026.

That added to a broad bounce in the dollar, which hit 106.70 on a basket of currencies, up from a three-month trough of 105.30 touched earlier in the week.

The dollar was up to 140.20 yen and off its recent low of 137.67, but faced resistance around 140.70/80.

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The euro held at $1.0368, having eased from a four-month peak of $1.0481 hit on Tuesday. Some policy makers argued for caution on tightening.

ECB President Christine Lagarde will give a keynote speech later on Friday that could offer guidance on which way the majority at the bank might hold.

In commodity markets, the bounce in the dollar and yields pushed gold back down to $1,762 an ounce after striking a peak of $1,786 early in the week.

Oil futures held steady in early trading, but nursed steep losses for the week on worries about Chinese demand and ever-higher US crude. it. Interest rates. Brent added 61 cents to $90.39, but was still down 5.8% on the week, while US it. Crude rose 75 cents to $82.39 a barrel.

(Reporting by Wayne Cole; Editing by Bradley Perrett)

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