Asian markets were mixed on Thursday following steep losses on Wall Street, as a spike in US Treasury yields led investors to scale back their expectations of interest rate cuts.
With the US presidential election still seen as a close contest less than two weeks away, there was significant uncertainty on trading floors.
However, observers noted that traders were eyeing a potential victory for Donald Trump, which could lead to policies that may stoke inflation once again.
This, combined with a strong run of economic data and comments from Federal Reserve officials backing a cautious approach to easing monetary policy, has led to reduced expectations for rate cuts.
Traders had been confident last month that the central bank would follow up September’s 50-basis-point cut with another reduction in November and a smaller one in December.
However, those expectations have diminished as Treasury yields have surged to 4.24 per cent, compared with 3.73 per cent in September.
Observers expressed concern that a Trump victory over Democratic rival Kamala Harris could result in tax cuts, increased trade tariffs, and further deregulation.
This has driven the so-called “Trump trade,” in which investors position themselves for such an outcome.
Sentiment has been “weighed down by the rise in yields and the reduction in Fed rate cut expectations,” said Rodrigo Catril of National Australia Bank.
“Strong economic momentum, along with Fed messaging that highlights a gradual and measured approach to further policy easing, is making the market nervous,” he added.
“When you also factor in the upcoming US election and its associated uncertainties—higher or lower taxes? more or less regulation? a new trade war?—it makes sense to take some profits off the table.”
All three main indexes on Wall Street closed sharply lower, with the Nasdaq falling by more than one per cent.
Hong Kong led the decline in Asia, shedding over one per cent, while Shanghai, Seoul, Taipei, and Manila also fell.
However, Tokyo, Sydney, and Wellington rose.
The drop in expectations of rate cuts has pushed the dollar up against other major currencies, bringing it to a near three-month high against the yen and a two-and-a-half-month high against sterling.
Gold extended Wednesday’s drop from its record high, as bonds now offer better returns than the precious metal, which does not provide interest.
Meanwhile, oil prices rose by more than one per cent, recovering from the previous day’s losses, as dealers assessed the demand outlook and the ongoing crisis in the Middle East, amid fears of Israel’s potential retaliation against Iran following this month’s missile attack.
Key figures around:
Tokyo – Nikkei 225: UP 0.1 per cent at 38,154.25 (break)
Hong Kong – Hang Seng Index: DOWN 1.4 per cent at 20,476.07
Shanghai – Composite: DOWN 0.7 per cent at 3,278.76
Euro/dollar: DOWN at $1.0782 from $1.0787 on Wednesday
Pound/dollar: DOWN at $1.2921 from $1.2929
Dollar/yen: UP at 152.66 yen from 152.65 yen
Euro/pound: UP at 83.45 pence from 83.41 pence
West Texas Intermediate: DOWN 1.2 per cent at $71.65 per barrel
Brent North Sea Crude: DOWN 1.1 per cent at $75.79 per barrel
New York – Dow: DOWN 1.0 per cent at 42,514.95 (close)
London – FTSE 100: DOWN 0.6 per cent at 8,258.64 (close)
AFP
