Asian Stocks Struggle as Oil Prices Surge and U.S. Treasury Yields Hit 16-Year Highs
SINGAPORE, Sept 20 (Reuters) – Asian stocks faced difficulty gaining ground on Wednesday as surging oil prices drove inflation and set the scene for the Federal Reserve to project higher interest rates for a longer period of time.
Brent crude futures, although slightly lower than the 10-month highs reached overnight, remain at $94.26 a barrel, showing a 30% increase over the past three months. This surge in oil prices can be attributed to Saudi Arabia and Russia’s commitment to extending output cuts.
The rise in energy costs has led to a higher-than-expected spike in Canadian inflation, causing the loonie to rise and triggering sell-offs in the Treasury market. Benchmark 10-year Treasury yields reached their highest levels since 2007 at 4.371% overnight and were last recorded at 4.36%.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell by 0.2%, along with Japan’s Nikkei (.N225). Furthermore, the S&P 500 (.SPX) also slipped by 0.2% on Wall Street overnight.
While futures pricing suggests almost no chance of a Fed rate hike at 1800 GMT, traders have started reducing their bets on cuts in 2024 and will closely monitor the U.S. central bank’s economic projections and chair Jerome Powell’s news conference.
Sam Rines, the managing director at research firm CORBŪ in Texas, stated, “The previous dot plot saw many participants expecting a cut in 2024. There is no reason for those dots to significantly move.” He also noted that the Powell presser poses a “risk management” aspect, which could be positive regarding downward adjustments to the policy rate if inflation decreases, but negative in terms of threats of future tightening.
The Fed meeting marks the beginning of a week packed with central bank meetings and data releases. British inflation figures are set to be released on Wednesday, followed by central bank meetings in Sweden, Switzerland, Norway, Britain, and Japan on Thursday.
Foreign exchange markets have remained relatively stable ahead of the Fed meeting, with the exception of the yen, which continues to face pressure. Masato Kanda, Japan’s top financial diplomat, stated that Japanese authorities are in close communication with their U.S. counterparts and will not rule out any options if “excessive moves persist.” The yen has experienced an 11% decrease against the dollar this year, reaching a 10-month low of 147.95 and trading at 147.80 early on Wednesday.
Although benchmark 10-year Japanese government bonds remain around 0%, they have recently crept towards the Bank of Japan’s adjusted tolerance for yields, which is 1% either side of zero, currently at 0.72%.
The euro has remained steady at $1.0684, while commodity-exporters’ currencies have shown strength. The New Zealand dollar, buoyed by strong dairy price gains at an overnight auction, continues to hold modest recent gains at $0.5940.
As expected, China left benchmark lending rates unchanged on Wednesday, keeping the yuan steady at 7.2946 per dollar.
The Aussie remained at $0.6415, while sterling halted its slide and held at $1.2390 ahead of British inflation data, which is expected to show an increase to 7% year-on-year.
Kristina Clifton, a strategist at Commonwealth Bank of Australia, stated, “The risk lies towards stronger outcomes given very strong labor earnings growth.” She believes that a stronger CPI result could cause financial markets to fully price in a 25-basis point hike for the Bank of England on Thursday and support sterling.
Gold prices have been held back by rising yields, with spot gold trading at $1,929 an ounce.
Meanwhile, wheat prices, which had been driven down by massive shipments from Russia, have stabilized due to expectations of dry weather affecting output in Australia and Argentina.
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