Asian shares fall as Fed hike relief rally fizzles

Pan-Europe stock futures rise; FTSE futures down ahead of BoE.
Image: Bloomberg

Asian stocks stumbled and the dollar regained its footing on Thursday as investors continued to digest the impact of surging inflation and an aggressive policy tightening outlook from global central banks.

Stock futures in Europe pointed to a slightly higher open, with pan-region Euro Stoxx 50 futures and German DAX futures up about 0.4% a day after the European Central Bank promised fresh support to temper a bond market rout.

FTSE futures FFIc1 were down 0.1% ahead of an expected rate rise by the Bank of England aimed at tackling inflation. Read full story

In Asia, the turn lower in shares came after the US Federal Reserve on Wednesday approved its biggest interest rate hike since 1994, lifting the target federal funds rate by 75 basis points to a range of between 1.5% and 1.75%. Fed officials also see further steady rises this year, targeting a federal funds rate of 3.4% by year-end. Read full story

While equity investors initially cheered the widely expected move, rising unease over the course of the trading day ate away at gains.

Fed projections showed US economic growth slowing to a below-trend rate of 1.7%, and policymakers expect to cut interest rates in 2024.

“The thing that I keep reminding myself and others is that they’re terrible at forecasting, haven’t got a clue where the economy is going,” said Rob Carnell, head of research and chief economist for Asia-Pacific at ING.

“So we really should take no comfort at all in these forecasts that GDP growth is going to be 1.7% this year and next year … when their economy has until very recently been going like a train.”

Data on Friday showed a sharper-than-expected rise in US inflation in May, alongside a University of Michigan survey showing consumers’ five-year inflation expectations jumping sharply to their highest since June 2008. Read full story

In a news conference following the Fed’s latest two-day policy meeting, Fed Chair Jerome Powell said that the survey was “quite eye-catching”.

“(Inflation expectations) are starting to look like they’re too high. That I think is one reason why Powell wanted to do a 75 … And I think they will also go again in July,” said Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

“They’ve got to get inflation down. They’re so far behind the curve it’s not funny.”

MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.46% lower in afternoon trade, erasing earlier gains. Australian shares slipped 0.20% and Chinese blue-chips fell 0.62%. Hong Kong’s Hang Seng fell 1.31%.

In Tokyo, the Nikkei trimmed earlier gains of as much as 2.38%, and was last 0.40% higher.

Room to rise

After retreating from a 20-year peak following the Fed meeting, the dollar regained its footing in the Asian session.

“It looked like a classic case of ‘buy the rumour, sell the fact’ as the dollar sold off and Wall Street rallied,” said Matt Simpson, senior market analyst at CityIndex. “(But) given the trajectory for Fed hikes … we very much doubt the top is in place for the US dollar.”

The global dollar index, which tracks the greenback against a basket of six peers, was last up 0.27% at 105.08, with the dollar jumping to 134.34 against the yen.

The euro edged down 0.15% to $1.0427.

US Treasury yields also took a turn lower, reflecting rising risk aversion, with the 10-year yield US10YT=RR slipping to 3.3068% from a close of 3.3950% on Wednesday.

The two-year yield fell to 3.2525% from a close of 3.2790% on Wednesday.

In commodity markets, oil prices recovered from a steep drop as investors focused on tight supplies. Brent crude was last up 0.27% to $118.83 per barrel and US crude CLc1 added 0.49% to $115.88.

Gold was slightly lower as the dollar firmed. Spot gold last traded at $1,831.26 per ounce, down 0.12% on the day.

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