Japanese shares erased initial gains on Friday and fell about 1.5% as investors turned their attention to speed bumps that are likely to slow this year’s blistering rally in Tokyo. South Korea’s benchmark dropped after index provider MSCI Inc. once again thwarted the nation’s bid for an upgrade to developed-market status. 

Asia’s biggest losses were in Hong Kong, where traders played catch-up following a holiday on Thursday. Friday’s decline extended the run of losses to four straight days amid concern that even if China does provide more aid for the economy, it won’t have a major impact on markets. 

“They probably can’t ignite animal spirits to the same extent where stimulus will get them into high growth multipliers,” Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore, said on Bloomberg Television. He expects Beijing to try to “cushion” the economy and hold growth just above 5% as investors worry about regulatory uncertainty, troubles in the property sector and geopolitical tensions. Mainland exchanges remained closed Friday.    

Treasury two-year yields hovered around 4.78% and near the highest since March after Federal Reserve chair Jerome Powell said the US may need one or two more rate increases in 2023. 

Rate hikes from policymakers in England, Norway and Switzerland underscored the upward pressure on bond yields. The yields rose on Australian and New Zealand 10-year bonds on Friday. The rate on Japan’s 10-year benchmark was steady.

US equity futures edged down, taking little relief from Treasury Secretary Janet Yellen’s view that the risk of a US recession is declining. She suggested that a slowdown in consumer spending may be the price to pay for finishing the campaign to contain inflation.

There are signs of low conviction in the S&P 500’s rally this year, with the index set to end its longest weekly winning streak since 2021. Bank of America Corp.’s latest survey shows a net 25% of global money managers are still underweight US equities, despite a recent improvement in allocation.

Signs of risk aversion were also on show in currency markets, with a gauge of dollar strength rising 0.2% as commodity currencies including the Australian dollar and the Norwegian krone fell. 

The yen fluctuated after its recent depreciation to around 143 versus the dollar, a move that stoked speculation that authorities in Tokyo may turn to verbal intervention. Stronger-than-expected inflation also fuelled suggestions that the Bank of Japan may adjust its price forecasts or tweak its ultra-loose monetary policy. 

In commodities, oil added to a slump of more than 4% on Thursday as worries about high interest rates rattled investors, overshadowing a drop in US crude inventories. Gold was set for its biggest weekly drop since early February. DM