Asian Stocks Slip as Bond Market Rally Pauses
Asian stocks broke a three-day winning streak on Tuesday as the bond market’s rally paused and investors tempered their optimism about a potential peak in global interest rates.
Australia’s Central Bank Decision in Focus
All eyes are on Australia’s central bank, as a policy decision is due at 0330 GMT. The question is whether the Reserve Bank of Australia will raise rates, which could make it the odd man out among central banks.
The market has priced in a 60% chance of a rate hike due to stubbornly high core inflation last quarter. If rates are raised, Australia’s benchmark cash rate could reach a 12-year high of 4.35%. This uncertainty has put pressure on the Australian dollar, which fell slightly against the US dollar.
The ASX200 also slipped by 0.4%, ending its five-session winning streak. MSCI’s broadest index of Asia-Pacific shares outside Japan fell by 0.6%, following a three-day rally that saw the benchmark rise by nearly 6%. Japan’s Nikkei also declined by 0.8%.
Fed’s Decision and Jobs Report Impact
Last week, the US Federal Reserve decided to keep interest rates unchanged. A benign jobs report on Friday further reinforced the belief that there might not be any more rate hikes in this cycle.
However, two-year US Treasury yields rose overnight, partially reversing the previous week’s fall. Ten-year yields also rose on Monday after a significant drop last week. The Nasdaq extended its winning streak to seven sessions, but with only a slight gain of 0.3%, indicating some loss of momentum in the rally. S&P 500 futures and European futures both fell by 0.2%.
According to Ben Bennett, APAC investment strategist for Legal and General Investment Management, it will take a few more weeks of data to determine the market’s direction. In the meantime, equity markets could be volatile due to economic uncertainties.
Foreign Exchange Markets and Geopolitical Risks
In foreign exchange markets, the slightly stronger dollar pushed the Japanese yen back to the weaker side of 150 to the dollar. The euro took a breather at $1.0710, and analysts predict that any potential decline in the greenback will be modest and turbulent even if the Fed begins cutting rates next year.
The US dollar index remained steady at 105.32. Deutsche Bank strategists Alan Ruskin and George Saravelos believe that weak global growth and geopolitical risks will continue to support the dollar as a safe haven, slowing down any downward trend.
Australia’s Rate Hike Expectations
All of Australia’s “Big Four” banks expect rates to rise today, although market expectations are divided enough to cause volatility regardless of the outcome. Implied AUD/USD volatility reached a two-month high overnight.
According to Commonwealth Bank analyst Carol Kong, any weakness in the Australian dollar is likely to be more noticeable against other currencies rather than against the US dollar if the Reserve Bank of Australia keeps rates unchanged.
Commodity Markets
In commodity markets, Brent crude futures stabilized at $84.86 per barrel due to concerns about expanding conflict in the Middle East and its potential impact on supply. Additionally, Russia and Saudi Arabia reaffirmed their commitment to production cuts.
Gold experienced modest losses at $1,975, while bitcoin hovered just below $35,000.
Hot Take: Uncertainty Persists in Asian Stocks
Despite a recent winning streak, Asian stocks slipped as the bond market rally paused and concerns about global interest rates lingered. The focus is on Australia’s central bank decision and whether rates will be raised. The possibility of a rate hike has put pressure on the Australian dollar, while the ASX200 ended its winning streak. The US Federal Reserve’s decision to keep interest rates unchanged and a benign jobs report contributed to market uncertainty. Foreign exchange markets saw a stronger dollar and potential turbulence ahead. Geopolitical risks and weak global growth continue to support the US dollar. Australia’s rate hike expectations have caused volatility, and commodity markets remain cautious.
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