An Asian shares gauge was set to end a two-day losing streak, with benchmark indexes rising in Hong Kong, Australia and Japan. The Topix headed for the highest in more than two weeks. 

Traders have been cautiously inching toward a risk-on posture as jitters in the financial sector subside. Financial firms led the way on Wall Street on Monday, while energy producers also gained. The tech-heavy Nasdaq 100 ended the session 0.7% lower, capping a two-week advance. 

The two-year Treasury yield slipped back below the 4% level in Asia trading after surging 23 basis points on Monday. Sentiment from the US session flowed across to trading in Australia and New Zealand, where rates on government debt climbed. 

A gauge of dollar strength fell lower for a second day. The yen strengthened after Japan’s cabinet approved the use of some funds from the fiscal 2022 budget for measures to cushion the impact of inflation.

“As that is inflationary, it puts upwards pressure on the Bank of Japan to move away from their negative interest policy sooner than later,” said Matt Simpson, senior market analyst at City Index. “We could also be witnessing the yen repatriation trade, where large corporations move funds back to Japan ahead of the end of the fiscal year on March 31.”

Meanwhile, the market remains on the lookout for signals of a recession later this year as the Federal Reserve and other central banks could be forced to implement higher-for-longer rate hikes to tame inflation.

Swaps traders priced in about a 50% probability that the Fed will lift rates by a quarter point at its next gathering. They continue to price in sharp easing thereafter, with the policy rate sliding to about 4.2% in December, down from around 4.9% in May.

“I think that they are still going to do another 25 or possibly another 50 basis points, and then they’re going to hold it through the end of the year,” Cheryl Smith, portfolio manager at Trillium Asset Management, said on Bloomberg Radio. “They’re going to keep those interest rates high because that’s the only tool that they have, the only tool that they know that will slow down an economy and lead to lower inflation.”

JPMorgan’s chief strategist Marko Kolanovic said the first quarter “will likely mark the high point for equities this year,” recommending investors stay defensive in a research note. 

“We view the most vulnerable areas as unprofitable companies that depend on steady flow of equity capital to fund operations and tight carry trades implemented over the last 10 to 20 years,” Kolanovic wrote. 

One of Wall Street’s most prominent bears, Morgan Stanley strategist Michael Wilson was also cautious on stocks, saying earnings estimates and valuations need to come down.

Elsewhere in markets, Asian shares related to digital currencies fell in the wake of Bitcoin’s drop. The token fell 2.7% on Monday after the US Commodity Futures Trading Commission sued Binance Holdings for allegedly breaking trading and derivatives rules. Bitcoin fluctuated on Tuesday. 

Oil held a surge on Tuesday after posting the biggest daily rally since October, rising by around 5% on Monday. Gold slightly rose. BM/DM