Growing fears about the Federal Reserve’s plans to fight surging inflation by ramping up interest rates hit Asian markets again on Wednesday, following hefty sell-off on Wall Street, while oil prices extended their rally after a blast at a key pipeline.
A rise in prices since early 2021 has forced central banks around the world to start winding back the colossal financial support put in place at the start of the pandemic, with many warning that failure to act could see them run out of control. Finance chiefs in several countries have already put the wheels in motion, but the main focus is on the Fed – the central bank of the world’s biggest economy – which has so far refrained from lifting rates, until now.
Officials are currently reining in their massive bond-buying programme and aim to hike borrowing costs in March. But while boss Jerome Powell has said the policy board will be careful in its approach and mindful not to jeopardise the economic recovery, there is a worry it will have to be more aggressive than initially thought to bring inflation down from four-decade highs. Some commentators are predicting a 50 basis-point rise in March – which would be the first that big since 2000 – having initially estimated 25 points.
There is a worry [the Fed] will have to be more aggressive than initially thought to bring inflation down from four-decade highs
Expectations for a quick run-up in costs has sent Treasury yields rocketing and caused near-panic on equity markets, with all three main indexes on Wall Street deep in the red so far this year, having hit multiple records in 2021. And the losses continued in most of Asia on Wednesday.
Sony, Toyota plunge
Tokyo shed 2.8 per cent, compounded by steep falls in market heavyweights Sony and Toyota. Sony collapsed almost 13 per cent – its biggest drop since 2008 – on news that rival Microsoft would pay $69 billion (€61bn) for US gaming giant Activision Blizzard, betting big on the prospects of the video game market. Toyota dived five per cent after warning it expected to miss its production target for this fiscal year. Sydney, Seoul, Singapore, Wellington, Taipei, Manila and Jakarta were also in retreat.
“Generally, we do expect to see that the bond market is going to drive volatility, more broadly based, across the equity markets and other markets as well,” Winnie Cisar, at CreditSights, told Bloomberg Television.
Hong Kong and Shanghai were also down, having reversed morning gains that came on the back of remarks from the Chinese central bank hinting it would unveil fresh economy-supporting measures, having cut interest rates on Monday for the first time since the start of the pandemic.
While markets are suffering heavy volatility owing, there remains a broad belief that the global recovery is still on track as economies reopen and fears over the less-severe Omicron COVID variant recede.
And a major sign of that is oil, which rallied again on Wednesday a day after both contracts hit more than seven-year highs on the back of demand optimism. The surge was given extra impetus by news of an explosion at a key pipeline running from Iraq to Turkey, which removed a key source of supply that transports more than 450,000 barrels a day, according to Bloomberg News.
That came a day after Yemen’s Huthi rebels in Abu Dhabi claimed an attack that triggered a fuel tank blast killing three people and warned civilians and foreign firms in the oil-rich United Arab Emirates to avoid “vital installations”.
“It’s a perfect storm,” Vandana Hari, of Vanda Insights, said.“A bunch of supply disruptions, lingering OPEC+ production shortfalls and heightened geopolitical tensions. Plus there’s low inventory levels combining with robust demand.”