Business Maverick

Business Maverick

Asia stocks extend global rout in wake of US CPI: market wrap

Asia stocks extend global rout in wake of US CPI: market wrap
A dilapidated oil rig on Lake Maracaibo in Cabimas, Venezuela, on Friday, 3 December 2021. (Photo: Gaby Oraa/Bloomberg)

Asian stocks, bonds and currencies tumbled in the wake of the broad-based selloff on Wall Street after hotter-than-expected inflation data fuelled bets for jumbo interest-rate hikes by the Federal Reserve. 

Equity indexes in Japan, Hong Kong and Australia slumped after US shares had their biggest drop in more than two years, with the S&P 500 falling more than 4% and the Nasdaq 100 sliding more than 5%. European equity futures fell while US contracts edged higher. 

Swaps traders are certain the Fed will raise interest rates three-quarters of a percentage point next week with some wagers appearing for a full-point move. That leaves investors weighing the prospect of tighter conditions across a swath of markets after jumping back into risk-sensitive assets in recent days on hopes that inflation would cool more. 

The two-year Treasury yield, the most sensitive to policy changes, climbed further in Asia after jumping as much as 22 basis points, pushing it more than 30 basis points above the 10-year rate and deepening an inversion in what is generally a recession warning. Australia’s benchmark 10-year yield jumped 10 basis points. 

“Markets had tried desperately to spin a bull case and fight the Fed, basically, and that’s a dangerous place to be,” Carol Schleif, deputy chief investment officer at BMO Family Office said on Bloomberg TV. Looking further ahead, she pointed to “a great deal of fiscal stimulus on its way into the market to take some of the place of the monetary stimulus that’s being withdrawn.”

The US consumer price index increased 0.1% from July, after no change in the prior month, Labour Department data showed. From a year earlier, prices climbed 8.3%, a slight deceleration but still more than the median estimate of 8.1%. So-called core CPI, which strips out the more volatile food and energy components, also topped forecasts. 

The reversal in markets casts a dark shadow over the debate about the outlook for the global economy and markets. Bank of America’s latest survey showed the number of investors expecting a recession has reached the highest since May 2020.

A gauge of the dollar fluctuated after climbing more than 1% on the CPI report. The greenback’s strength weighed Asian currencies, with the Korean won falling 1.5% and the yen’s weakness prompting Japan’s chief currency official to warn that the government wouldn’t rule out any options for responding to foreign exchange moves. 

The People’s Bank of China set the daily reference rate for the yuan at the strongest bias on record versus the average estimate in a Bloomberg survey of analysts and traders. 

“Many emerging markets are feeling the heat of the strong US dollar,” said Chi Lo, senior market strategist for Asia Pacific at BNP Paribas Asset Management, citing their debt burdens in greenbacks. “Only China can afford to defy this global rate-rise trend by keeping its easing policy stance.”

Bitcoin nursed a drop of more than 10% overnight, the biggest decline since cryptocurrencies plunged in June. 

Meanwhile, oil has steadied as a possible US plan to refill emergency crude reserves offset the drag from a stronger dollar and an industry report that pointed to a hefty increase in American commercial stockpiles.

West Texas Intermediate traded above $87 a barrel in Asia after a volatile session on Tuesday, when prices were buffeted by the storage plan and data showing inflation is still rampant. The US may start restocking the emergency reserve when crude dips below $80, people familiar with the matter said.

Oil hit the lowest level since January earlier this month as traders attempted to price in a possible global slowdown, tighter monetary policy, and lower energy demand. The hotter-than-expected US inflation figures have set the scene for another round of aggressive rate hikes from the Federal Reserve as well as further gains in the dollar, which is already near a record.

“The US plans to refill its strategic stockpiles may drive expectations that there could be a floor for prices,” said Yeap Jun Rong, market strategist at IG Asia Pte. But the guiding narrative may be the demand-outlook story, with “the CPI data providing the go-ahead for tighter monetary policy,” he said.

The industry-funded American Petroleum Institute reported US commercial crude stockpiles expanded by 6 million barrels last week, according to people familiar with the figures. Government data due Wednesday will provide greater clarity. The holdings jumped by 8.8 million barrels in the previous period.

US strategic reserves have plunged this year, hitting the lowest in almost 40 years, after President Joe Biden ordered the release of 180 million barrels to counter the inflationary fallout spurred by Russia’s invasion of Ukraine. Still, there have been mixed signals of late on the next step, with officials also weighing an additional sale given that curbs on Russian oil are set to tighten.

In Europe, possible energy rationing has exacerbated demand concerns as Moscow clamps down on supplies of gas. Later on Wednesday, European Commission President Ursula von der Leyen is set to lay out a raft of proposals to stem the crisis in a speech before the European Parliament. Traders will also review a monthly outlook from the International Energy Agency.

Widely-watched oil market time spreads have been volatile. Brent’s prompt spread – the difference between its two nearest contracts – was 98 cents a barrel in backwardation. That compares with 79 cents a week ago, but the figure was above $2 as recently as last month. BM

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