MSCI’s Asia-Pacific equity index slipped to a near four-week low as Japan shed about 1%. S&P 500 and Nasdaq 100 futures stabilised, eking out gains after slumps of more than 2% in both indexes on Monday.

Hong Kong and China bourses were a little more resilient. China has cut borrowing costs and plans special developer loans worth as much as 200 billion yuan ($29.3-billion) to ease a property crisis, moves that may aid sentiment.

The Fed’s brake on the US economy to ensure high inflation keeps cooling remains the key wider driver in global markets. Traders are bracing for hawkish talk at the central bank’s Jackson Hole symposium later this week.

Treasuries held an overnight selloff, with the 10-year yield now above 3%. Australian and New Zealand bonds fell. The dollar was steady and the euro near a two-decade low. 

Doubts are creeping in about bets that the Fed will temper monetary-policy tightening, expectations that had helped to lift investor sentiment. For instance, hedge funds in a key part of the derivatives market have made record wagers that the US central bank will stick to a hawkish script.

The Fed’s “incentives are to communicate that rate hikes will remain the norm for the balance of the year” even if eventually the pace will slow, Benjamin Jeffery and Ian Lyngen, strategists at BMO Capital Markets, wrote in a note.

Hedge funds collectively placed a big short across futures referencing the official successor to the London interbank offered rate known as the Secured Overnight Financing Rate. This position stands to benefit should Fed Chair Jerome Powell effectively rule out a dovish pivot at Jackson Hole.

Tightrope

Powell and his colleagues at the Fed are walking a tightrope, trying to contain price pressures while averting recession. At the same time, global growth risks span Europe’s energy crisis to China’s property and Covid troubles.

With total debt in the US at more than $30-trillion, a 1% increase in rates leads to a “huge” climb of more than $300-billion in interest payments, Tracy Chen, portfolio manager at Brandywine Global Investment Management, said on Bloomberg Television.

“How high can the Fed technically hike their interest rate? Is a 4%-5% fed funds rate realistic?” she said, underlying the sobering challenge that lies ahead.

Elsewhere, Bitcoin found its footing but is about $2,000 off levels that prevailed before a crypto swoon on 19 August. BM