Stocks subdued by outsized rate risks, yen fragile

People walk past an electric board showing Japan’s Nikkei share average in Tokyo, Japan September 14, 2022. REUTERS/Issei Kato

SINGAPORE  – Asia’s stock markets were mixed on Thursday, a day after their biggest slide in three months as investors weighed the risk of the Federal Reserve hiking interest rates by a jumbo 100 basis points next week to tackle sky-high inflation.

The Japanese yen also began slipping again, getting only a limited boost from the strongest hints yet of possible market intervention by Japanese authorities.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.1 percent and Japan’s Nikkei 0.2 percent .

EUROSTOXX 50 futures added 0.1 percent and FTSE futures firmed 0.4 percent . S&P 500 futures and Nasdaq futures were both near flat.

“Equity markets are presently in no-man’s land,” said Sean Darby, global equity strategist at Jefferies in Hong Kong.

“Better macro news to support earnings is discounted as (there is) the need for further tightening to quash growth – while CPI prints are not declining fast enough,” he said.

“The best metaphor is that the Fed is not only driving the economy using a rear view mirror but is now being forced to press the ‘rate rise’ accelerator just as bond markets are discounting an overtightening.”

Fed funds futures, which were dumped along with stocks after Tuesday’s stubbornly hot U.S. inflation reading, imply a 30 percent chance of a 100 basis point rate hike next week. They have the benchmark U.S. interest rate as high as 4.3 percent by February.

Treasuries were calm in Tokyo trade on Thursday, but the U.S. yield curve is deeply inverted – often a signal of a looming recession – as investors believe that rate hikes through this year and next will take a bite out of future growth.

Two-year yields, which track near-term rate expectations, edged up to 3.029 percent , bringing the rise for the week so far to 23 basis points in the seventh straight weekly gain.

The benchmark 10-year yield was at 3.424 percent , having climbed 11 basis points this week.

“(There are) two opposing forces for the 10-year note – the upward pressure from Fed hikes and downward pressure from a potential economic downturn in the future,” said NatWest Markets’ U.S. rates strategist Jan Nevruzi.

“We are more firmly in the camp that more hikes today increase the odds for a deeper recession.”

Line in the sand

One bright patch on Thursday was China’s beleaguered property sector, with news reports on forthcoming government support lifting a Hong Kong index of mainland developers 6.5 percent. The broader Hang Seng rose 0.8 percent .

In currency markets, the U.S. inflation shock and expectation of rate hikes in response have sent the greenback up to re-test recent multi-decade highs.

Thursday moves were modest, with the euro down a fraction at $0.9965 and the Aussie taking a small lift to $0.6758 after some mixed employment data.

The yen, pounded some 20 percent lower against the dollar this year, eased anew to 143.55 per dollar. It had bounced as far as 142.56 on Wednesday when the Bank of Japan checked dollar/yen rates with banks around the 145 per dollar level – a possible prelude to outright yen buying.

Japan has not intervened in forex markets since 2011 and back then it was to restrain an overly strong yen.

“I certainly don’t want to be the one to stand here and suggest that this (145 yen per dollar) is the line in the sand,” said Shafali Sachdev, head of FX, fixed income and commodities for Asia at BNP Paribas Wealth Management in Singapore.

“But what’s clear is that the market is wary of the level, and has tried to test the level a few times which seems to suggest that if it breaks, it may overshoot quite rapidly.”

Data out on Thursday showed Japan had posted a record trade deficit in August, one aggravated by the yen’s slide. That was also yet another weight on the currency.

Later in the day European trade data is due and Chinese President Xi Jinping meets Russia’s Vladimir Putin in Uzbekistan.

In oil markets, Brent crude futures dipped 24 cents to $93.86 a barrel. Spot gold dropped 0.4 percent to $1,689 an ounce, having steadily slipped as the dollar and U.S. yields have gone up.