Market Mind: Reality bites

The Fed rate announcement is seen on a screen on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., Feb 1, 2023. REUTERS/Andrew Kelly/File photo

A wave of selling is likely to crash over Asian markets on Monday following a sobering end to the week on Wall Street, as the reality of ‘higher for longer’ U.S. interest rates finally dawns on investors.

Consumer spending, labor market and business activity data suggest the U.S. economy is in much better shape than many had thought, and the coup de grace last week came in the form of unexpectedly strong inflation figures.

The implied peak Fed rate is approaching 5.5 percent – does anyone still think 6 percent is the stuff of fantasy? – U.S. and other bond yields are surging, and equities are feeling the heat.

The MSCI World index fell 2.7 percent last week, its biggest weekly fall since September, while Asian stocks ex-Japan fell almost as much for a fourth straight weekly loss and the steepest since October.

Tech stocks are in the firing line more than most. The Hang Seng tech index is down 17 percent in the past month, hit by higher rates and tighter financial conditions as well as profit-taking following an explosive 77 percent rebound from the low in October.

One consequence of the market’s Fed rethink is the sharp rise in bond yields and the dollar. Many Asian currencies are being pushed back toward their recent lows, boosting inflationary pressures across the region and making dollar-denominated debt servicing more expensive.

China’s yuan has 7.00/$ in its sights again, the yen and won are at their lowest this year – domestic Japanese and South Korean monetary policy factors are at play here too – and the Indian rupee is near its all-time low around 83.00 per dollar.

Investors’ nerves are being frayed even more by the deepening tensions between the United States and China over, among other things, the Russia-Ukraine war.

White House national security adviser Jake Sullivan said on Sunday that China has not moved toward providing lethal aid that would help Russia, a decision that Washington has warned would have serious consequences.

Asian economic data this week include purchasing managers index reports from China and other countries, Q4 GDP data from Australia and India, inflation figures from Australia, Indonesia and the Japanese capital, and the latest retail sales snapshots from Japan, Australia, Singapore and New Zealand.

Here are three key developments that could provide more direction to markets on Monday:

• Hong Kong trade (January)
• Thailand trade (January)
•  New Zealand retail sales (Q4)