© Reuters. Pedestrians are reflected in an electronic board showing various stock prices at a brokerage in Tokyo
By Wayne Cole and Echo Wang
SYDNEY / MIAMI (Reuters) – Asian stocks fell to month-long lows on Friday as a slump in global bond markets blew up yields and spooked investors amid fears that heavy losses could trigger distressed sales in other assets.
The scale of the sell-off prompted Australia’s central bank to launch a surprise bond-buying operation to try to stem the bleeding, helping yields break out of initial peaks.
Yields on 10-year Treasury notes fell to 1,494% from a one-year high of 1,614%, but still rose a surprising 40 basis points on the month in the biggest move since 2016.
“The decline in fixed income is entering a more lethal phase for risk assets,” says Damien McColough, Westpac’s head of rate strategy.
“Rising yields has long been viewed primarily as a story of improving growth expectations, if anything cushioning risky assets, but the overnight move notably included a sharp rise in real rates and a preview of the Fed’s take-off expectations. “
Markets were hedging the risk of an earlier rate hike from the Federal Reserve, though officials this week promised any move would be long going forward.
Fed fund futures are now almost fully priced for a 0.25% increase in January 2023, while Eurodollars have it discounted for June 2022.
Even the thought of an eventual end to super cheap money sent shivers down the global stock markets, which have regularly been hitting all-time highs and stretching valuations.
MSCI’s broader Asia-Pacific equity index outside of Japan fell 2.4% to a one-month low, while it lost 2.5%.
Chinese blue chips joined the pullback with a 2.5% drop.
NASDAQ futures fell 0.5% after a sharp drop overnight, while they were down 0.1%. EUROSTOXX 50 futures lost 1.2% and futures 1.1%.
Overnight, the Dow had lost 1.75%, while 2.45% and the Nasdaq 3.52%, the biggest drop in almost four months for the technology index.
All the techies suffered, with Apple Inc (NASDAQ :), Tesla (NASDAQ 🙂 Inc, Amazon.com Inc (NASDAQ :), NVIDIA Corp (NASDAQ 🙂 and Microsoft Corp (NASDAQ 🙂 the biggest obstacles.
All of that raised the importance of U.S. personal consumption data to be released later on Friday, which includes one of the inflation measures favored by the Fed.
In fact, core inflation is expected to fall to 1.4% in January, which could help defuse market distress, but any surprise to the upside would likely accelerate the decline in bonds.
Rising Treasury yields also sparked buzz in emerging markets, who feared that the best yields offered in the United States could attract funds.
All favored currencies for leveraged carry trades were affected, including the Brazilian real, the Turkish lira and the South African rand.
The flows helped push the US dollar higher more broadly, rising to 90,360. It also gained on the underperforming yen, briefly reaching the highest since September at 106.42. The euro was down a bit at $ 1.2152.
The jump in yields has clouded gold, which does not offer a fixed return, and dragged it to $ 1,767 an ounce from the week high around $ 1,815.
However, ANZ analysts were more optimistic about the outlook.
“Now we expect US inflation to reach 2.5% this year,” they said in a note. “Combined with a further depreciation of the US dollar, we see the fair value of gold at $ 2,000 / oz in the second half of the year.”
Oil prices held near 13-month highs, with profit taking limited by a sharp drop in production last week due to the winter storm in Texas. [O/R]
US crude fell 44 cents to $ 63.08 a barrel and lost 33 cents to $ 66.55.