By Wayne Cole
SYDNEY (Reuters) – Asian shares fell on Monday as the growing risk of more aggressive rate hikes in the United States and Europe pushed bond yields and the dollar sharply higher and tested equity and earnings valuations.
Federal Reserve Chairman Jerome Powell’s promise of policy “pain” to curb inflation dashed hopes that the central bank would lead the bailout of markets as it has so often done in the past.
The tough love message led European Central Bank board member Isabel Schnabel to warn over the weekend that central banks must now act strongly to fight inflation, even if it drags their economies into recession.
That sent Euribor futures sharply lower as markets priced in the risk that the ECB would hike by 75 basis points next month.
“The main objectives are that containing inflation is the first priority for the Fed and the Funds Rate needs to reach a restrictive level of 3.5% to 4.0%,” said Jason England, bond portfolio manager at global level at Janus Henderson Investors.
“The interest rate should remain higher until inflation falls to the 2% target, so rate cuts in the market for next year are premature.”
Futures are now pricing in about a 64% chance the Fed will hike 75 basis points in September and see rates peak in the 3.75-4.0% range.
Much may depend on what the August payrolls report shows this Friday, when analysts are looking for a modest gain of 285,000 after July’s blockbuster gain of 528,000.
The hawkish message was not what Wall Street wanted to hear, and S&P 500 futures fell a further 1.1%, having lost nearly 3.4% on Friday. Nasdaq futures lost 1.5% as technology shares were weighed down by the prospect of slower economic growth.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.9 percent. Japan’s Nikkei fell 2.8 percent, while South Korea fell 2.3 percent.
Chinese blue chips lost 0.6%, while EUROSTOXX 50 futures fell 1.7% in the wake of the ECB’s interest rate warnings.
The hawkish chorus from central banks pushed up short-term yields worldwide, while further inverting the Treasury curve as investors priced in a possible economic downturn. [US/]
U.S. two-year yields rose seven basis points to 3.466%, the highest since late 2007 and well above the decade high of 3.10%. Yields have also risen across Europe with double-digit gains in Italy, Spain and Portugal.
All this benefited the safe-haven US dollar as it soared to a new two-decade high of 109.40 against a basket of major currencies, surpassing its previous high since July.
The dollar gained 0.7% to the yen’s five-week high of 138.58, with bulls looking to retest July’s high of 139.38.
The euro was struggling at $0.9927, not far from last week’s two-decade low of $0.99005, while sterling fell to a 2-1/2-year low of $1.1656.
“EUR/USD may remain below parity this week,” said Joseph Capurso, head of international finance at CBA.
“Energy security fears will remain front and center this week as Gazprom shuts down its main pipeline to deliver natural gas to Western Europe for three days from August 31 to September 2,” it added. “There are fears that gas supply may not be restored after the shutdown.”
Those fears saw gas futures in Europe surge 38% last week, adding further fuel to the inflation fire.
The rise in the dollar and yields weighed on gold, which fell to $1,725 an ounce. [GOL/]
Oil prices moved higher on speculation that OPEC+ could cut output at its Sept. 5 meeting. [O/R]
Brent rose 58 cents to $101.57, while U.S. crude added 87 cents to $93.93 a barrel.
(Reporting by Wayne Cole; Editing by Shri Navaratnam)