Sovereign bonds and shares declined in Asia after hawkish signaling from the Federal Reserve intensified a selloff in Treasuries and fueled a volatile session for the S&P 500.
Yields surged across tenors in New Zealand and Australia, with those on Australia’s 10-year reaching the highest since 2011. The moves mirrored the slump in Treasuries after hawkish Fed messaging overtook earlier optimism about the deal to avoid a US government shutdown. Yields on five- to 30-year Treasuries all jumped about 10 basis points Monday, while those on the benchmark 10-year note climbed to the highest since 2007. Treasuries steadied in Asia Tuesday.
An Asian equity benchmark headed for the lowest since November as stocks slumped across the region. Shares also fell at the open in Hong Kong as trading resumed after a holiday. US stock futures were little changed. China is in the midst of a weeklong holiday.
Materials and energy stocks sold off in the region on Tuesday, following drops by those sectors in the US on Monday. China Evergrande defied the decline, surging as much as 42% as it restarted trading after a halt last week.
The selloff in global bonds gathered momentum as the US shutdown reprieve prompted traders to raise bets on a November rate hike from the Fed to a roughly one-in-three chance, up from the 25% likelihood priced on Friday.
Fed Vice Chair for Supervision Michael Barr said the biggest question before central bankers was how long to leave rates elevated, while known FOMC hawk Michelle Bowman reiterated her call for multiple hikes. Cleveland Fed President Loretta Mester said on Monday the central bank will likely need to raise rates once more this year and then hold them at higher levels for some time to get inflation back to its 2% target.
As long as inflation is still far from target, “the Fed is gonna keep rates high and we are expecting higher rates for longer,” Xi Qiao, managing director for wealth management at UBS, said on Bloomberg Television. “That could be good for the US dollar, but more caution on the equity markets.”
Japan Auction
The dollar gained against most of its Group-of-10 peers after Bloomberg’s dollar index jumped 0.7% Monday. The greenback touched a year-to-date high versus the yen after the Bank of Japan said it would conduct an additional buying operation.
Japan’s Ministry of Finance will auction benchmark 10-year sovereign bonds Tuesday in a test for its debt market. Yields on the 10-year have recently risen to levels unseen since 2013.
Meanwhile, the Reserve Bank of Australia is forecast to leave its policy rate unchanged for a fourth meeting on Tuesday, even as Australian home prices stayed strong in September.
“The RBA board has been on hold over the last three meetings, showing a balanced approach to its achievement of the inflation target after the ‘risk management’ hikes in May and June,” strategists at JPMorgan Chase & Co. including Ben Jarman wrote in a note. “We have viewed the balanced approach as reasonable, but still see scope for one more hike,” which is likely to come in November, they said.
New Zealand’s central bank on Wednesday is also expected to keep rates unchanged 10 days from a general election.
Elsewhere, gold steadied after slipping to the lowest since March. Oil retreated, with West Texas Intermediate dropping below $90 a barrel. A Citigroup Inc. analyst said waning demand from China is poised to to cap the gains from OPEC+ supply cuts.
Key events this week:
- China has week-long holiday
- Australia rate decision, Tuesday
- Atlanta Fed President Raphael Bostic speaks on economic outlook and inflation, Tuesday
- August US JOLTS report, Tuesday
- New Zealand rate decision, Wednesday
- Eurozone services and composite PMIs, Wednesday
- ECB President Christine Lagarde gives welcome address at conference, Wednesday
- US ISM services index, Wednesday
- France industrial production, Thursday
- BOE Deputy Governor Ben Broadbent, Riksbank First Deputy Governor Anna Breman participate at panel discussion, Thursday
- US trade, initial jobless claims, Thursday
- San Francisco Fed President Mary Daly speaks at the Economic Club of New York, Thursday
- Germany factory orders, Friday
- US unemployment rate, nonfarm payrolls, Friday
Some of the main moves in markets:
Stocks
- S&P 500 futures were little changed as of 10:28 a.m. Tokyo time. The S&P 500 was little changed
- Nasdaq 100 futures were little changed. The Nasdaq 100 rose 0.8%
- Japan’s Topix index fell 1.2%
- Hong Kong’s Hang Seng Index fell 1.5%
- Australia’s S&P/ASX 200 Index fell 1.4%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.0474
- The Japanese yen was unchanged at 149.86 per dollar
- The offshore yuan was little changed at 7.3234 per dollar
- The Australian dollar was little changed at $0.6357
Cryptocurrencies
- Bitcoin fell 1.4% to $27,465.82
- Ether was little changed at $1,664.3
Bonds
- The yield on 10-year Treasuries was unchanged at 4.68%
- Japan’s 10-year yield declined 0.5 basis point to 0.770%
- Australia’s 10-year yield advanced nine basis points to 4.58%
Commodities
- West Texas Intermediate crude fell 0.8% to $88.15 a barrel
- Spot gold fell 0.2% to $1,824.31 an ounce
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Jason Scott.
