Asian markets suffered fresh losses Wednesday as concerns about rising inflation and frothy equity prices continued to sap confidence, with investors unmoved by reassurances from Federal Reserve boss Jerome Powell that officials would maintain record-low interest rates for as long as needed.
Global stock indexes have cruised to all-time or multi-year highs in recent months thanks to government and central bank backing, the rollout of vaccines, easing of lockdowns, Joe Biden’s imminent stimulus and falling infection rates.
But the rally is showing signs of fatigue as traders fret that valuations may have run ahead of themselves, while the yield on benchmark 10-year Treasury bonds — a key red flag on inflation — has spiked.
That has led to worries the Fed will have to lift borrowing costs more quickly than expected, removing a key pillar of support for stocks.
Powell sought to soothe those concerns Tuesday in the first of two congressional testimonies, saying inflation was expected to pick up and be “volatile” this year as Americans begin to spend more but told lawmakers the increases were unlikely to be large or persistent.
He pledged to keep the bank’s vast bond-buying scheme and low rates in place “until substantial further progress has been made toward our goals” of two percent inflation and full employment
He added that the rise in yields showed “confidence on the part of markets that we will have a robust and ultimately complete recovery”.
US inflation had averaged less than two percent over the past 25 years, he said.
His comments helped Wall Street bounce off intra-day lows, with the Dow and S&P 500 ending slightly higher. But the Nasdaq fell as tech firms that rely more heavily on financing are most at risk from high interest rates.
Powell’s “success was striking a balanced tone”, said Axi’s Stephen Innes.
“Too dovish, and the chair risked exacerbating near-term inflation concerns, and too hawkish of a lean and the Street will increasingly price a withdrawal in liquidity. So overall, the balancing act seems mostly designed to keeping risk assets steering on an even keel.”
But he warned the fear about rates remained in place, “and despite some great news on vaccine and stimulus, it’s becoming increasingly apparent that the yield reaction to the reflation theme will likely be the central narrative of 2021”.
Asia struggled, however, with Tokyo, Hong Kong, Shanghai, Sydney, Wellington, Taipei and Manila all seeing significant losses. Singapore, Seoul and Jakarta edged up.
“The mega-cap sectors and stocks that benefitted from the Covid-19 pandemic stay-at-home (SAH) environment, weak economic activity, and new lows in fixed income yields have been giving way” to the recovery theme, said Canaccord Genuity equity strategist Tony Dwyer, adding the selling could worsen.
On currency markets, the pound held on to gains to sit at levels not seen since April 2018 thanks to a strong rollout of vaccines across Britain that has allowed the government to set out a plan to reopen the country by the summer.
Tokyo – Nikkei 225: DOWN 0.8 percent at 29,923.82 (break)
Hong Kong – Hang Seng: DOWN 0.6 percent at 30,445.39
Shanghai – Composite: DOWN 0.7 percent at 3,612.26
Pound/dollar: UP at $1.4170 from $1.4106 at 2200 GMT
Euro/dollar: UP at $1.2156 from $1.2147
Euro/pound: DOWN at 85.79 pence from 86.08 pence
Dollar/yen: UP at 105.45 yen from 105.19 yen
West Texas Intermediate: DOWN 0.7 percent at $61.25 per barrel
Brent North Sea crude: DOWN 0.4 percent at $65.11 per barrel
New York – Dow: UP less than 0.1 percent at 31,537.35 (close)
London – FTSE 100: UP 0.2 percent at 6,625.94 (close)
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