(Bloomberg) — Asian stocks and bonds are facing a second consecutive day of declines as investors reassess their expectations for Federal Reserve interest rate cuts for the remainder of the year.
The MSCI AC Asia Pacific Index dropped by as much as 1.1%, with Australian and Japanese benchmarks falling while Chinese markets saw gains. This comes after US equities retreated from nearly overbought levels following a strong rally to record highs.
On Monday, 10-year Treasury yields surged by 11 basis points to 4.20% after Federal Reserve Bank of Kansas City President Jeffrey Schmid expressed a preference for a slower pace of interest rate cuts due to uncertainties surrounding how low the US central bank should ultimately go. Australian and New Zealand bonds also saw declines.
Kieran Calder, head of equity research at Union Bancaire Privee in Singapore, noted that the risk of a slower rate-cutting pace could be positive for the dollar and present a challenge for Asian equities.
Various factors, such as supply concerns and strong US economic data, are driving the selloff in bonds, according to Chris Weston, head of research at Pepperstone Group Ltd. He also mentioned that US election speculation is weighing on the market, with traders anticipating a potential ‘Red Sweep’ scenario where Republicans take control of the White House and Congress.
A victory for Donald Trump in the presidential election could raise worries about his support for looser fiscal policies and high tariffs, which could exacerbate the federal deficit and inflation, thereby undermining Treasuries.
The likelihood of Federal Reserve officials keeping interest rates unchanged in November is increasing as the US economy continues to show strength, as noted by Torsten Slok, chief economist at Apollo Global Management.
Asian stock markets are gearing up for a busy week of listings, the busiest in over two years, which will serve as a crucial test of demand as companies rush to raise funds ahead of the US election. Hyundai Motor India Ltd. is set to begin trading in Mumbai on Tuesday after raising $3.3 billion in the largest-ever initial public offering in South Asia.
In Japan, Tokyo Metro Co.’s $2.3 billion listing, scheduled for October 23, saw strong demand, with foreign investors seeking over 35 times the shares available to them, according to lead underwriters.
Calder highlighted that soft US markets are typically not favorable for Asia, especially with several IPOs scheduled this week that will gauge retail and institutional demand.
Meanwhile, market participants will be monitoring Beijing’s stimulus efforts to boost its struggling economy. Central Huijin Investment Ltd., a unit of China’s sovereign wealth fund, issued bonds that pushed its total local debt sales to a record high this year.
Chinese banks reduced their benchmark lending rates on Monday following the central bank’s easing in September, part of a series of measures aimed at halting a downturn in the housing market.
Jim Caron, CIO of Morgan Stanley Investment Management Portfolio Solutions Group, questioned how much the stimulus would translate into improved financial conditions that would lead to sustained demand.
Japanese traders are keeping a close watch on the upcoming weekend’s election. Support for Prime Minister Shigeru Ishiba’s ruling coalition appears to be waning, raising the possibility of a weaker and less stable administration post-election.
The currency markets are on edge as the yen weakened against the dollar, reaching 151 per dollar on Tuesday.
Wall Street is facing a significant earnings challenge this week, with about 20% of S&P 500 companies set to report. Traders are eagerly awaiting key results from companies such as Tesla Inc., Boeing Co., and United Parcel Service Inc.
According to the latest Bloomberg Markets Live Pulse survey, respondents view Corporate America’s results as more critical for the equity market’s performance than the outcome of the November election or the Federal Reserve’s policy direction.
Nvidia Corp. reached a record high, with the Nasdaq 100 up by 0.2%. The Russell 2000 fell by 1.6%, while homebuilders saw declines. United Parcel Service tumbled following a sell recommendation from Barclays Plc, while Boeing rallied after reaching a tentative agreement with its workers’ union.
Matt Maley at Miller Tabak noted that the stock market’s high valuation makes it particularly vulnerable to political and geopolitical concerns.
Gold stabilized after hitting a record high in the previous session as investors digested Federal Reserve officials’ views on US interest rates. Oil was moderately lower after a nearly 2% increase on Monday amid tensions in the Middle East.
Key events scheduled for this week:
– ECB’s Christine Lagarde to be interviewed by Bloomberg Television on Tuesday
– BOE’s Andrew Bailey, ECB’s Klaas Knot, and Robert Holzmann to speak at Bloomberg Global Regulatory Forum in New York on Tuesday
– Philadelphia Fed President Patrick Harker to speak on Tuesday
– Canada rate decision on Wednesday
– Eurozone consumer confidence on Wednesday
– US existing home sales on Wednesday
– Earnings reports from Boeing, Tesla, Deutsche Bank on Wednesday
– Fed’s Beige Book on Wednesday
– US new home sales, jobless claims, S&P Global Manufacturing and Services PMI on Thursday
– Earnings reports from UPS, Barclays on Thursday
– Fed’s Beth Hammack to speak on Thursday
– US durable goods, University of Michigan consumer sentiment on Friday
Market movements:
Stocks
– S&P 500 futures down 0.2% as of 1:01 p.m. Tokyo time
– Japan’s Topix down 1%
– Australia’s S&P/ASX 200 down 1.6%
– Hong Kong’s Hang Seng up 0.5%
– Shanghai Composite up 0.5%
– Euro Stoxx 50 futures up 0.1%
Currencies
– Bloomberg Dollar Spot Index unchanged
– Euro at $1.0819
– Japanese yen at 150.96 per dollar
– Offshore yuan at 7.1342 per dollar
Cryptocurrencies
– Bitcoin down 0.5% to $67,356.95
– Ether down 1.2% to $2,641.99
Bonds
– 10-year Treasury yield up one basis point to 4.21%
– Japan’s 10-year yield up three basis points to 0.985%
– Australia’s 10-year yield up 15 basis points to 4.42%
Commodities
– West Texas Intermediate crude down 0.2% to $70.43 a barrel
– Spot gold up 0.4% to $2,731.58 an ounce
This article was created with the help of Bloomberg Automation.
–With assistance from Jason Scott, Winnie Hsu, and Abhishek Vishnoi.
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.