(AFP PHOTO / MANAN VATSYAYANA)
HONG KONG – Asia markets rose Monday following another Wall Street record, with attention on this week’s Federal Reserve policy meeting, which comes as investors fret that an expected economic recovery will fan inflation and force the bank to hike interest rates earlier than thought.
The general mood across trading floors is of a blockbuster surge in global growth this year as the rollout of vaccines and easing of lockdowns allow life to return to a semblance of normal.
Bets on a strong rebound this year increased last week as Joe Biden signed off his $1.9 trillion stimulus, which includes big cash handouts for struggling Americans.
The president’s pledge to ramp up the country’s inoculation programme with an aim for herd immunity around the summer also provided some cheer to traders.
However, the government spending splurge combined with an expected boost in consumer spending has also ramped up inflation expectations.
That is reflected in the spike in government debt yields, particularly benchmark 10-year Treasury notes — a canary in the coal mine for coming price increases — fanning worries the Fed will be forced to hike borrowing costs.
And while yields remain relatively low, Charles-Henry Monchau of FlowBank SA said: “It’s not just a question of level, it’s a question of pace.
“Are we going to move on the bond yields too quickly too fast for the market to adjust or is it going to be a smooth journey to higher bond yields?”
The Fed’s reaction to market angst over rising yields will be closely watched when it holds its two-day policy meeting from Tuesday.
The bank’s ultra-loose monetary policies, including record low interest rates, have been a key pillar of the surge in equities over the past year but fears of possible tightening moves have seen that wobble in recent weeks.
Yellen inflation confidence
Still, analysts expect it to maintain its dovish position, with governor Jerome Powell likely to reiterate that policymakers are willing to accept higher inflation to get back to full employment for the foreseeable future.
“I think it’s ‘markets be damned’ at this point,” said Robert Frick of Navy Federal Credit Union.
“The Fed has said that until the real improvement in employment and in the economy, they’re not going to budge,” Frick told AFP. “I really don’t think they’re going to waver.”
Treasury Secretary Janet Yellen on Sunday played down inflation fears, telling ABC’s “This Week” she saw only a “small risk” and “absolutely” does not expect a return to the runaway inflation of the 1970s.
The Dow at S&P 500 ended Friday at an all-time high for the second day in a row, and Asia broadly tracked the gains.
Hong Kong, Tokyo, Sydney, Singapore and Jakarta were all in the green, though Shanghai and Taipei fell. Manila plunged more than three percent after data showing a surge in new Covid infections in the Philippines.
There was little reaction to figures showing Chinese retail sales and industrial production rose more than expected last month.
Patrik Schowitz, at JP Morgan Asset Management, said he was upbeat about the outlook for markets.
“Last week did little to challenge our conviction macro views: strong growth is ahead, driven by economic reopening and turbo-charged by fiscal stimulus and loose monetary policy,” he said in a commentary.
“Despite elevated valuations across both equities and credit it’s very hard not to be positive on risk assets in this environment.”
The bulk of the rise in bond yields may be done for now, he said.
“On a middle of the road view, there’s certainly more upside for equities, but probably somewhat constrained by already-high valuations.”
Key figures around 0230 GMT
Tokyo – Nikkei 225: UP 0.3 percent at 29,815.62 (break)
Hong Kong – Hang Seng: UP 0.8 percent at 28,936.55
Shanghai – Composite: DOWN 0.1 percent at 3,449.02
Euro/dollar: DOWN at $1.1946 from $1.1952 at 2245 GMT on Friday
Pound/dollar: UP at $1.3926 from $1.3922
Euro/pound: DOWN at 85.80 pence from 85.82 pence
Dollar/yen: UP at 109.17 yen from 109.00 yen
West Texas Intermediate: UP 1.0 percent at $66.24 per barrel
Brent North Sea crude: UP 0.9 percent at $69.84 per barrel
New York – Dow: UP 0.9 percent at 32,778.64 (close)
London – FTSE 100: UP 0.4 percent at 6,761.47 (close)