Asia markets retreat as rate fears trump recovery optimism

Most stocks fell in Asia on Friday as the euphoria from the Federal Reserve’s upbeat economic outlook was replaced by fears the recovery will fan inflation and force policymakers to wind back on their pledge to maintain record interest rates for as long as needed.

While mind-boggling amounts of government stimulus and central bank support have helped the global economy bounce back from last year’s virus-induced collapse, traders have been battling for weeks to reconcile the bright outlook and the danger of runaway prices.

The Fed on Wednesday sought to placate the pessimists by once again promising it will not touch rates until it is satisfied unemployment has been controlled and inflation is running hot for an extended period.

Bank boss Jerome Powell and Treasury Secretary Janet Yellen have repeatedly said the expected lift in inflation this year would be short-term and that a rally in benchmark Treasury yields — a guide to future rates — was a sign of confidence in the economy.

After dipping Wednesday, yields hit a 14-month high on Thursday, sparking a plunge in US markets with the Nasdaq more than three percent down as tech firms are more susceptible to higher interest rates. The Dow and S&P 500 retreated from record highs.

And the losses carried through to Asia where Hong Kong, Shanghai and Taipei all fell more than one percent, while Tokyo, Sydney, Seoul, Manila and Jakarta also suffered selling pressure. Singapore, Wellington and Bangkok did edge up.

“There is a fear brewing that the Federal Reserve’s monetary policy will spur on inflation to a level that will ultimately force their hands sooner than later,” said Axi’s Stephen Innes.

“And make no mistake, we are very much in a ‘growth up’ and ‘rates up’ world, and at the end of the day, we will always end up with more questions than answers in this type of environment.”

Europe’s new lockdowns
Still, Jun Bei Liu at Tribeca Investment Partners remained upbeat.

“Economic recovery is on its way and we have central banks around the world very committed to easy monetary policy,” she said. “All of that together will indicate this is just short-term profit-taking and the underlying fundamentals of the equity market are looking very strong.”

The edginess among investors was partly being pushed by worries that Europe’s recovery could be knocked off course as a rise in new virus cases forces some governments to reimpose containment measures.

French Prime Minister Jean Castex on Thursday put Paris and several other regions into limited lockdown after the country saw its highest daily caseload in nearly four months.

Bulgaria and Ukraine were also due to unveil tougher restrictions, while the World Health Organization issued a warning on rising infections in Central Europe and the Balkans.

The increase in new cases comes as leaders on the continent moved to resume administering the AstraZeneca vaccine after halting it over blood clot fears. Medical experts concluded there was no threat from the jab but the move jolted an already stuttering inoculation rollout in Europe.

Oil markets stabilised after taking a seven percent hammering Thursday in reaction to data showing a jump in US stockpiles to their highest since December as well as worries about demand in Europe caused by the new lockdowns.

National Australia Bank’s Rodrigo Catril said there were also concerns about rising tensions between the US and major producer Russia.

“With the US threatening sanctions, analysts are speculating Russia could retaliate by flooding the market with oil,” he said in a note.

Key figures around 0230 GMT
Tokyo – Nikkei 225: DOWN 0.9 percent at 29,954.80 (break)

Hong Kong – Hang Seng: DOWN 1.2 percent at 29,049.96

Shanghai – Composite: DOWN 1.1 percent at 3,423.90

Euro/dollar: DOWN at $1.1907 from $1.1916 at 2100 GMT

Pound/dollar: DOWN at $1.3912 from $1.3928

Euro/pound: UP at 85.58 pence from 85.52 pence

Dollar/yen: UP at 109.02 yen from 108.90 yen

West Texas Intermediate: UP 0.3 percent at $60.17 per barrel

Brent North Sea crude: UP 0.4 percent at $63.56 per barrel

New York – Nasdaq: DOWN 3.0 percent at 13,116.17 (close)

London – FTSE 100: UP 0.3 percent at 6,779.68 (close)