Business Maverick

Business Maverick

Asia stocks rise as bank fears ease; Fed path eyed: markets wrap

Asia stocks rise as bank fears ease; Fed path eyed: markets wrap
The Marriner S. Eccles Federal Reserve building in Washington, D.C., US, on Sunday, May 22, 2022. (Photo: Joshua Roberts/Bloomberg)

A mildly positive tone for risk taking returned to Asian equity markets on Tuesday as immediate concerns over the strength of the global financial system dissipated.

A benchmark of the region’s stocks gained about 0.5% as shares rose in Hong Kong, South Korea and Australia. Most sectors rose, with financial stocks outpacing the broader gauge. 

Futures for the S&P 500 were slightly higher following a jump of 0.9% Monday in the underlying index. News that US officials were studying ways to temporarily guarantee all bank deposits if the current financial crisis expands sent contracts for the S&P 500 and the Nasdaq 100 to their intraday highs. 

Also supporting sentiment during the Asian session was a rebound in Additional Tier 1 bonds sold by banks in the Asia-Pacific region. 

The dollar steadied and was set to end a three-day losing streak, which sent a measure of the greenback’s strength to a month-low on Monday. That came as expectations grew that the Federal Reserve may adopt a more cautious policy approach when it decides on interest rates on Wednesday. 

Government bond yields were lower in Australia and New Zealand after Treasuries whipsawed through the global trading day on Monday. Board minutes showing that Australia’s central bank would consider a pause in rate hikes next month weighed on the nation’s yields and the Australian dollar. 

The policy-sensitive two-year US Treasury yield ended on Monday 14 basis points higher and just below 4%. There was no trading of cash Treasuries in Asia hours on Tuesday with a holiday in Japan.

Investors are closely monitoring the Fed’s meeting and have increased bets on a quarter-point hike as the recent financial turmoil has spurred speculation on a slower pace of tightening from major central banks worldwide.

Just a couple of weeks ago, investors were betting it would raise rates close to 6% and that the European Central Bank would hike past 4%. Now markets imply the tightening cycles are almost over and wager on multiple rate cuts in the US by year-end. 

Swap traders currently see the Fed’s benchmark ending the year around 4% — a whole percentage point below the central bank’s rate estimate in the December “dot plot” that comes as part of the quarterly economic projections.

“Further rate hikes are no longer warranted, in our opinion”, Ed Yardeni, president of Yardeni Research Inc, wrote in a note. Fed chair Jerome Powell will have to acknowledge that “the crisis confirms that interest rates are sufficiently restrictive and that financial conditions are rapidly getting tighter,” he said.

The Fed can take a pause in this week’s meeting to help banks without having to worry over being seen to have blinked, said Erin Gibbs, chief investment officer at Main Street Asset Management. 

“I don’t think it’s going to give the impression that they’re done. I mean, we know that we still have over 6% inflation in the US. We know that those rate hikes should be coming if we don’t see those decreases,” she said on Bloomberg Television.

Elsewhere, oil fell after a turbulent session even as a calmer tone returned to the market. Gold edged higher. BM/DM

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