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Bears Have a Grip on Stocks as Yields, Dollar Jump: Markets Wrap


Stocks in Asia look set for a downbeat open Tuesday after worries about Federal Reserve monetary tightening saddled US shares with their worst drop in two months while boosting bond yields and the dollar.

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(Bloomberg) — Stocks in Asia look set for a downbeat open Tuesday after worries about Federal Reserve monetary tightening saddled US shares with their worst drop in two months while boosting bond yields and the dollar.

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Futures slid for Japan and Australia but Hong Kong’s were steady after a gauge of US-listed Chinese shares bucked the slumps in the S&P 500 and Nasdaq 100. Contracts on the latter two indexes fluctuated in early Asian trading.

China has cut borrowing costs and plans special loans for developers worth as much as 200 billion yuan ($29.3 billion). These moves to tackle a property crisis may be a prop for sentiment on the mainland and in Hong Kong.

The Fed’s brake on the US economy to ensure high inflation keeps cooling remains the key wider driver in global markets. Traders are bracing for hawkish talk at the central bank’s Jackson Hole retreat later this week.

Shorter maturities led a Treasuries selloff against that backdrop, pushing the 10-year yield above 3%. The dollar rose and the euro weakened to a fresh two-decade low. Recession fears are dragging on the euro as Russia foments an energy crisis by choking gas supplies in the fallout from its war in Ukraine.

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Doubts are creeping in about bets that the Fed will temper monetary-policy tightening, expectations that had helped to lift investor sentiment. For instance, hedge funds in a key part of the derivatives market have made record wagers that the US central bank will stick to a hawkish script.

The Fed’s “incentives are to communicate that rate hikes will remain the norm for the balance of the year” even if eventually the pace will slow, Benjamin Jeffery and Ian Lyngen, strategists at BMO Capital Markets, wrote in a note.

Hedge funds collectively placed a big short across futures referencing the official successor to London interbank offered rate known as the Secured Overnight Financing Rate. This position stands to benefit should Fed Chair Jerome Powell effectively rule out a dovish pivot at Jackson Hole.

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Tightrope

Powell and his colleagues at the Fed are walking a tightrope, trying to contain price pressures while averting a US recession. At the same time, growth risks are evident across the world, from the euro-area to China.

With total debt in the US at more than $30 trillion, a 1% increase in rates leads to a “huge” climb of more than $300 billion in interest payments, Tracy Chen, portfolio manager at Brandywine Global Investment Management, said on Bloomberg Television.

“How high can the Fed technically hike their interest rate? Is a 4%-5% fed funds rate realistic?” she said, underlying the sobering challenge that lies ahead.

Elsewhere, oil held above $90 after Saudi Oil Minister Prince Abdulaziz bin Salman warned the disconnect between the futures market and fundamentals may force OPEC and its allies to act. Gold and Bitcoin nursed losses.

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What to watch this week:

  • US new home sales, S&P Global PMIs, Tuesday
  • Minneapolis Fed President Neel Kashkari speaks at a Q&A session, Tuesday
  • US durable goods, MBA mortgage applications, pending home sales, Wednesday
  • US GDP, initial jobless claims, Thursday
  • Kansas City Fed hosts its annual economic policy symposium in Jackson Hole, Wyoming, Thursday
  • ECB’s July minutes, Thursday
  • Fed Chair Powell speaks at Jackson Hole, Friday
  • US personal income, PCE deflator, University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

  • S&P 500 futures rose 0.1% as of 7:05 a.m. in Tokyo. The S&P 500 fell 2.1%
  • Nasdaq 100 futures added 0.1%. The Nasdaq 100 fell 2.7%
  • Nikkei 225 futures fell 0.9%
  • Australia’s S&P/ASX 200 index futures lost 0.6%
  • Hang Seng index futures were little changed

Currencies

  • The Bloomberg Dollar Spot Index rose 0.6%
  • The euro was at $0.9944
  • The Japanese yen was at 137.50 per dollar
  • The offshore yuan was at 6.8678 per dollar

Bonds

  • The yield on 10-year Treasuries advanced four basis points to 3.01%

Commodities

  • West Texas Intermediate crude was at $90.56 a barrel, up 0.3%
  • Gold was at $1,736.02 an ounce

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