Asia markets swing as rate hike fears offset reflation trade

Markets fluctuated in Asia on Tuesday as traders struggle to reconcile growing optimism about the global recovery and worries that the expected surge in economic activity will fan inflation and force central banks to hike interest rates sooner than expected.

A rally in equities across the world over the past year has started to run out of steam in recent weeks, despite the prospect of a sharp rebound in growth as vaccines are rolled out, infections slow, lockdowns are eased and the US prepares to pass another massive stimulus.

European indexes enjoyed a much-needed blast upwards — led by a record close in Frankfurt — after EU leaders pledged to double vaccine deliveries to 300 million doses between April and June, having been too slow out of the blocks in its immunisation programme.

But Wall Street was a mixed bag, with the Dow also hitting a new all-time high but the S&P 500 in the red and Nasdaq shedding more than two per cent as tech firms such as Apple continue to suffer, having rocketed last year as they benefited from people being stuck at home.

“The major indexes can’t roar higher unless the love for big-tech returns,” said OANDA’s Edward Moya.

The divergence in the Dow and Nasdaq comes down to traders shifting into cyclical stocks that benefit more in times of economic booms such as airlines and construction firms, while financials were also rising along with interest rate expectations.

“There’s definitely a lot of volatility in the market right now and many of the sectors that underperformed last year are rallying — this is part of a rotation,” said Valerie Grant, at AllianceBernstein.

Eyes on Fed meeting
After Monday’s losses, Asia markets were mixed in early trade. Hong Kong rose one per cent and Singapore put on more than one per cent, while there were also gains in Tokyo, Sydney and Jakarta but Shanghai, Seoul, Wellington, Taipei and Manila all fell.

Next week’s Federal Reserve policy meeting will be pored over for signs of change in its outlook for interest rates and its huge bond-buying scheme, with Joe Biden’s $1.9 trillion stimuli likely to have been signed off by then.

A rise in benchmark US Treasury yields in recent weeks has been fuelled by investors moving out of the safe-haven assets who are betting a rise in inflation will eat into their returns. That has sparked fears the US central bank will be forced to hike borrowing costs sooner than it initially thought, removing a key pillar of the equity markets surge.

“A key question for the March… meeting is how participants will revise their economic and interest rate projections to reflect further fiscal stimulus,” said Axi strategist Stephen Innes.

“With so much riding on the Fed at the moment, you can’t help but think the market has started to zero in on next week’s (meeting), which comes at a fragile time for risk sentiment and inflation forecasting.”

Treasury Secretary Janet Yellen has said that while she did not see inflation being a major problem, if there was a worrying spike then “there are tools to deal with that”.

But National Australia Bank’s Rodrigo Cattrill pointed out that “the tool to ‘deal with that’ is higher interest rates — precisely the sentiment the market has been adopting this year”.

Key figures around 0230 GMT
Tokyo – Nikkei 225: UP 0.2 per cent at 28,800.81 (break)

Hong Kong – Hang Seng: UP 1.0 per cent at 28,813.43

Shanghai – Composite: DOWN 0.8 per cent at 3,392.99

Dollar/yen: UP at 109.18 yen from 108.88 yen at 2240 GMT

Euro/dollar: UP at $1.1852 from $1.1848

Pound/dollar: UP at $1.3830 from $1.3819

Euro/pound: UP at 85.70 pence from 85.68 pence

Brent North Sea crude: UP 0.7 per cent at $68.71 per barrel

West Texas Intermediate: UP 0.6 per cent at $65.43 per barrel

New York – Dow: UP 1.0 per cent at 31,802.44 (close)

London – FTSE 100: UP 1.3 per cent at 6,719.13 (close)