Markets mostly rose in Asia on Tuesday but traders struggled to reconcile growing optimism about the global recovery with worries that the expected economic surge will fan inflation and force interest rates hikes 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 coronavirus vaccines are rolled out, infections slow, lockdowns are eased and the United States 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 with its immunisation programme.
Wall Street was a mixed bag, however, 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 divergence in the Dow and Nasdaq came 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.
Bets on higher US rates pushed the dollar past 109 yen for the first time since June.
“Stock markets heavy with the winners of 2020 are suffering, while previously unloved markets heavy with boring banks, consumer staples, resource and property companies are catching more of the global recovery trade winds,” said OANDA’s Jeffrey Halley.
After Monday’s losses, most Asia markets battled to eke out gains.
Tokyo rose one per cent along with Singapore, while Sydney, Wellington, Taipei, Manila, Mumbai and Bangkok were in positive territory. Hong Kong dipped after rising more than one per cent in the morning, while Shanghai dropped 1.8 per cent. Seoul, Wellington and Jakarta also fell.
Eyes on Fed meeting
The losses in Hong Kong and mainland China came despite reports the country’s “national team” of state-linked bodies had stepped in to provide support to the struggling markets, just as its leaders hold their main policy-setting meeting in Beijing. The funds often pile in to provide stability and prevent a rout, most notably during the country’s 2015 equity collapse.
Still, officials are keen to stop stocks running too hot and the central bank has moved in recent weeks to remove excess liquidity from financial markets.
Next week’s US 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 President Joe Biden’s $1.9 trillion stimulus likely to have been signed by then.
Next week’s US 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 President Joe Biden’s $1.9 trillion stimulus likely to have been signed by then
A rise in benchmark US Treasury yields in recent weeks has been fuelled by investors moving out of the safe-haven assets, betting that 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”.
The auctions of US Treasuries this week will be closely followed with observers warning any sign of weak demand, which would push yields up to make them more attractive, could spark another sell-off in equities.