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Asian stocks rally hits wall as treasuries drop: markets wrap

Asian stocks rally hits wall as treasuries drop: markets wrap
Members of the public walk through a piece of installation art by Moroccan artist Amine El Gotaibi entitled 'Illuminate the Light', at a media preview for the 1-54 Contemporary African Art Fair at Somerset House on October 12, 2023 in London, England. (Photo by Dan Kitwood/Getty Images)

The rally in Asian equities halted as Treasury yields surged after the latest US inflation data bolstered bets on Federal Reserve rate hikes. The latest data on continued weakness in China’s economy added to the gloom.

MSCI’s Asia Pacific Index fell about 0.9%, on course to snap a six-day winning streak, with the region’s benchmark indexes in the red. Hong Kong and mainland Chinese shares extended losses from the open after both consumer and producer prices came in below estimates, a sign that the economy still faces drags despite the government rolling out a series of measures to bolster the market this year.

“The divergence between hot US CPI and PPI data and softer China inflation are glaring,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank. “This underscores an even sharper US-China policy divergence as a result of which the US dollar may continue to dominate amid higher real US yields.”

Swap contracts pushed the odds of another quarter-point Fed hike to about 40% — from closer to 30% on Wednesday after the so-called core consumer price index, which excludes food and energy costs, increased 0.3% in the US last month. From a year ago, it rose 4.1%, the lowest since 2021. Economists favour the core gauge as a better indicator of underlying inflation than the overall CPI, which rose 0.4%, boosted by energy costs. Forecasters had called for a 0.3% monthly advance in both measures.

News that China is considering forming a state-backed stabilisation fund to shore up confidence in its $9.5-trillion stock market may still aid sentiment.

Read more: China Weighs New Stabilization Fund to Prop Up Stock Market

Treasuries gained slightly in Asia after dropping across the curve in the previous session, with the yield on the 30-year rate surging as much as 19 basis points after a $20-billion auction of the securities drew weak demand. 

The dollar steadied after strengthening against all of its Group-of-10 peers Thursday following the increase in Treasury yields. The yen inched closer to the 150 mark.

The Fed will want flexibility optionality around an additional rate hike, “just given the fact that inflation could stall out at a higher level,” Nadia Lovell, senior equity strategist at UBS Global Wealth Management, said on Bloomberg Television. “It’s much easier to tilt hawkish in an environment where economic growth is strong and then dial that back if you need to than to be dovish just in case inflation surprises to the upside.”


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