Reports: On Friday, Asian stocks fell to an 11-month low as worries about a potential regional conflict in the Middle East grew, long-term U.S. yield pressure increased, and supply concerns drove up oil prices.
World Markets: Asian stocks fall to an 11-month low
Global borrowing costs have increased as a result of the overnight rise in the 10-year U.S. benchmark yield to 5%.
As the yield on Japan’s 10-year government bond reached a ten-year high on Friday, the Bank of Japan made an intervention in the market.
The market reacted erratically to Federal Reserve Chair Jerome Powell’s widely seen speech overnight, but most traders continued to lean more in favour of bets that the Fed will prolong its rate pause in November.
The largest weekly loss for MSCI’s Asia-Pacific equities outside of Japan was a substantial 3% as the index fell 0.8% to a level not seen since November of last year.
The Nikkei in Tokyo dropped 1% and lost 3.6% on the week.
Hong Kong’s Hang Seng index sank 1%, while China’s blue chips fell 0.4%.
China maintained its benchmark lending rates on Friday despite indications of a stabilising economy.
Additionally, sentiment is shaky following Tesla’s 9% share price decline following its disappointing quarterly results, which were sparked by Elon Musk’s warning about consumer demand and an EV stock sell-off.
On the geopolitical front, concerns about a regional confrontation that could expand are growing after the United States intercepted multiple drones and three cruise missiles that the Iran-aligned Houthi movement had fired from Yemen, possibly towards Israel.
As a predicted ground invasion aimed at completely eliminating Hamas draws closer, U.S. President Joe Biden urged Americans in a speech on Thursday to contribute billions more to Israel’s military campaign against the terrorist organisation.
According to Kyle Rodda, senior financial market analyst at capital.com, “world leaders continue to trek to the Middle East to – if nothing else — delay the onset of any further hostility.”
“The markets are trembling in anticipation of a change: gold and oil, the clearest measures of public opinion regarding the conflict, are still rising.”
Amidst the uncertainty, investors sought safe-haven assets, and gold prices surged to a two-month high of $1982.09 per ounce, the most since late July.
Due to concerns about supply caused by the growing regional strife in the Middle East, oil prices are expected to rise for the second week in a row.
U.S. crude had a 1% increase to $90.33 per barrel, while Brent saw a 0.8% daily increase to $93.2.
Powell seemed to align himself overnight with other Fed members who have previously stated that the bond market is now partially performing the functions of the central bank.
Powell, however, tread carefully when making his comments, highlighting both the need to proceed cautiously and the possibility that additional rate hikes would be necessary given that the economy had outperformed expectations.
On Friday, the US dollar traded just shy of the heavily watched 150 yen mark.
It stood at 106.34, up 0.1% from its peers, not too far from the 11-month high of 107.34 reached early this month.
After briefly touching the 5.0% level in Asia for the first time since 2007, the 10-year yield has since stabilised around 4.9620% as investors dealt with the durability of the US economy, worries about the rise in US debt issuance, and the possibility of interest rates staying high for longer.
This week saw a surge of 35 basis points, the highest weekly increase in more than ten years.
According to Quincy Krosby, chief global strategist at LPL Financial, the Treasury market has grown obsessed with supply, and there is growing concern that this will lead to an increase in the U.S. deficit due to Washington’s increased demands for defence expenditure.
We are now discussing not only the front including the confrontation between Russia and Ukraine, but also the Middle East, which needs to be resolved.
In order to pay for all of this, the United States will require an increasing amount of supplies through auctions.
Wednesday saw a decline in sterling as investors remained cautious and continued to process data from Tuesday that revealed UK inflation unexpectedly remained at 6.7% in September, hinting at the potential of another interest rate hike.
At 08:51 GMT, the value of sterling had decreased by 0.3% versus the US dollar to $1.2106 and by the same amount versus the euro to 87.03 pence.
According to Nicholas Rees, FX market analyst at Monex Europe, “Sterling has been trading with its typical high beta to global risk conditions in recent days.”
This morning, worries about a potential spike in energy prices brought on by the Middle East crisis put the pound under pressure once more.
Additionally, the market is eagerly awaiting Jerome Powell, the chair of the Federal Reserve, to speak at 1600 GMT.
According to Fiona Cincotta, senior financial markets analyst at City Index, “Sterling is falling for a third straight day on dollar strength owing to haven flows, and the expectation is that the Federal Reserve will keep interest rates higher for longer.”
U.S. Treasury yields have reached a 16-year high.
On a domestic level, traders are still analysing the wage data from Monday and the inflation figures from Tuesday.
The statistics indicating that growth in regular pay for British workers slowed from a previous record high and that job openings also decreased was followed by the hotter-than-expected consumer price print.
In contrast to the inflation data, indications of a softening employment market increased the likelihood that the Bank of England will keep interest rates steady at its next meeting.
According to Rees from Monex, “there was a slight beat on inflation and a modest undershoot on the wages data.”
Overall though, both indicate a lessening of inflationary pressures, and given that speakers at the Bank of England have lately set a high bar for the resumption of rate hikes, we don’t believe that this round of data much affects the MPC of the pound.
The probability that the BoE would keep rates steady at its upcoming meeting in November is 82%, according to the money markets.
September’s UK retail sales are expected on Friday, and next week will see the release of an initial reading of October’s corporate activity.
The US Dollar
Friday saw the dollar come dangerously close to the heavily watched 150 yen mark, helped by an increase in the yield on the US 10-year Treasury note, which briefly hit 5% overnight for the first time since 2007.
This week, the benchmark 10-year yield—which was last at 4.9456%—has increased by more than 30 basis points due to growing forecasts that the Federal Reserve will likely hold interest rates higher for an extended period of time as well as growing concerns about the state of the US economy.
The Fed’s withdrawal from the market as a price-insensitive buyer has caused a surge upward.
There is also less demand from abroad.
It’s a classic supply and demand effect when combined with the deficit’s unexpectedly high issuance, according to Brian Jacobsen, chief economist at Annex Wealth Management.
This maintained pressure on the yen, which was last trading at 149.85 per dollar, not far from the psychological threshold of 150 per dollar, which some traders had speculated may lead to Japanese government intervention, as it did the previous year.
Changes in long-term Treasury rates, especially in the 10-year maturity, are often closely followed by the dollar/yen exchange rate.
Although it was still much above its two-week low of $1.2093, which was reached on Thursday, sterling was still down 0.03% at $1.2135.
The rising Treasury yields helped the U.S. dollar gain ground in the wider currency market.
The dollar index increased by 0.07% to 106.28, but a weekly loss of roughly 0.3% was anticipated.
Fed Chair Jerome Powell stated in a widely followed speech on Thursday that the strength of the US economy and the ongoing tight labour markets may necessitate even stricter borrowing requirements to control inflation, though he added that rising market interest rates may lessen the need for the central bank to intervene.
According to Ray Attrill, head of FX strategy at National Australia Bank, “the market seems to be more comfortable with the view that the Fed is going to pause, or at least pass on a rate rise out of the Oct. 31-Nov. 1 meeting.”
“While Powell hasn’t completely ruled out the possibility of higher rates, there were a few words in his speech that I believe indicate a slight softening of the tone.”
According to the CME FedWatch tool, money markets are nearly completely expecting the Fed to hold interest rates at its forthcoming policy meeting, down from a roughly 94% possibility one week ago.
In other news, the Australian dollar dropped 0.21% to close at $0.63155, while the euro dipped 0.06% to $1.0575.
The New Zealand dollar fell 0.35% to $0.5829 on Thursday, after plunging to a low of $0.5816, which was more than 11 months ago.
The statistics released earlier this week indicated that New Zealand’s consumer inflation dropped to a two-year low in the third quarter, putting the kiwi on course for a weekly loss of about 1%.
Though it did little to impact the yen, statistics released on Friday in Asia revealed that Japan’s core inflation in September slipped below the 3% barrier for the first time in more than a year, but it remained above the central bank’s 2% objective.
In the meantime, amid indications that some segments of the faltering economy might be gradually regaining stability, China maintained its benchmark lending rates steady at the monthly fixing on Friday, in line with market expectations.
“Before year-end, in particular, I do anticipate some additional monetary easing,” Commonwealth Bank of Australia currency strategist Carol Kong stated.
“I believe that the Chinese economy is still fairly fragile underneath, even with the stronger-than-expected data dump and GDP earlier in the week.”
Rand in South Africa
In early trade on Thursday, the South African rand lost ground due to rising U.S. Treasury yields ahead of Federal Reserve Chair Jerome Powell’s speech.
Around 0.5% weaker than its previous finish, the rand was trading at 19.0775 against the dollar at 07:33 GMT.
Expectations that the Fed will maintain higher interest rates for an extended period of time drove U.S. Treasury yields to 16-year highs on Wednesday.
“The USD will eventually run stronger if yields continue to rise,” experts from Rand Merchant Bank stated during a morning briefing.
In addition to domestic variables, the rand frequently follows international trends like monetary policy in the United States.
According to Andre Cilliers, currency analyst at TreasuryONE, “the dollar is stronger and dampening risk sentiment due to the rate hike concerns and heightened Middle East tensions.”
Cilliers continued, “poor local retail sales data also did not help the rand’s cause.”
The world’s markets will be watching Powell’s speech later today for clues about the direction of interest rates in the largest economy in the world going forward.
The Johannesburg Stock Exchange’s blue-chip Top-40 index had a 0.9% decline at opening, while shares fell as well.
The benchmark 2030 government bond for South Africa saw lower prices in early trade, with a yield increase of 13.5 basis points to 10.960%.