(Bloomberg) — Losses loomed for Asian stock markets on Monday as investors took in Federal Reserve Chairman Jerome Powell’s dovish message that interest rates will rise for longer in a painful fight against inflation.
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Futures lost almost 2 percent for Japan and 1.5 percent for Australia after a 3.4 percent drop in the S&P 500. The decline was triggered by Powell’s rebuttal of the idea that the tightening trajectory of monetary policy could soon be eased.
Friday’s drop in the U.S. further pared the global rally in stocks from June bottoms in bear markets, which had been fueled in part by bets the Fed would cut rates next year as growth slows. Powell highlighted the need for sustained tightening, comments that pushed two-year U.S. Treasury yields to their highest since 2022 and sent investors rushing to the dollar as a safe haven from volatility.
Greenback strength could be a drag on Asian markets on Monday. Investor anxiety was evident over the weekend as bitcoin flirted with a sustained break below $20,000, a sign of waning risk appetite.
Powell was “really hawkish” in Jackson Hole, said Manish Bhargava, fund manager at Straits Investment Holdings in Singapore. There will be “a lot of red on Monday” in a raucous summer rally as money exits emerging markets, he said.
Powell’s comments were a further boost to the dollar, analysts at Westpac Banking Corp said. and Bank of Singapore. The latter’s chief economist, Mansoor Mohi-ud-Din, said it was both a safe haven and a higher-yielding trade deal compared to lower-yielding G10 currencies such as the euro, pound and yen.
“USD/JPY is the most obvious way to play for an increasingly hawkish Fed, with 140 likely to retreat ahead of the September FOMC meeting,” said Sean Callow, senior currency strategist at Westpac.
The dollar is up more than 10% this year, while the yen’s 16% retreat leaves it at the bottom of the G10, a split reflecting the Bank of Japan’s continued easy-money stance that Governor Haruhiko Kuroda reaffirmed in Jackson Hole.
Borrowing costs
But the overwhelming message from the symposium was that borrowing costs are rising from the US through Europe and Asia. Officials are grappling with one of the highest inflation rates in a generation, fueled by a breakdown in energy and component supply chains due to Russia’s war in Ukraine and China’s Covid containment.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell told an audience at the Fed’s annual meeting. “Historical evidence strongly cautions against premature policy easing.”
Investors now see the Federal Reserve’s interest rate peaking in March at around 3.80% and reduced bets for a cut in 2023. The US yield curve between five and 30-year maturities inverted for the second time this month, while the spread between the higher two-year yield and the 10-year yield widened.
The inversions suggest that the bond market expects a recession to be the necessary casualty to bring price pressures back under control.
Hong Kong Catalyst
Jackson Hole has overshadowed other developments, including a tentative deal between Beijing and Washington that allows U.S. officials to review the audit documents of Chinese firms doing business in the U.S. This is a first step towards preventing the delisting of about 200 Chinese companies from US exchanges.
Hong Kong stock futures were flat, with a gauge of U.S.-listed Chinese shares the worst performer of Friday’s broader Wall Street sell-off.
“The risk of delisting is coming down and I think that’s a catalyst to support the Hong Kong market,” said Grace Tam, chief investment adviser at BNP Paribas Wealth Management in Hong Kong.
The bigger picture, however, is the Fed’s goal of tightening financial conditions in the world’s largest economy until inflation is visibly defeated. Incoming data on employment and consumer prices will be critical to measuring progress.
“The Fed’s outlook game has shifted from guessing how high the peak rate might be to understanding how long it might stay there,” said Yancey Tan, currency strategist at Malayan Banking Bhd. in Singapore.
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