6-7-2023 (TOKYO) Stock markets across the Asia-Pacific region experienced a decline on Thursday, following a global downturn in equities. The U.S. Federal Reserve’s confirmation of its hawkish stance, coupled with an escalating trade battle between China and the United States, dampened market sentiment.
In Tokyo trading, U.S. 10-year Treasury yields reached a fresh four-month high, while the dollar continued its upward trajectory against major currencies. Japan’s Nikkei share average slumped by more than 1%, extending its retreat from 33-year highs. Hong Kong’s Hang Seng fell by 0.9%, and mainland blue chips edged 0.2% lower. Australia’s stock benchmark slid by 1%, and Taiwan shares retreated by 0.7%.
MSCI’s broadest index of Asia-Pacific shares dropped by 0.7% following a 0.4% decline in the global index on Wednesday. U.S. E-mini stock futures indicated a 0.1% lower start for the S&P 500, following its overnight decline of 0.2%.
While most Fed officials agreed to maintain interest rates last month, minutes of the meeting released on Wednesday revealed that a majority of members anticipate the need for further tightening of policy in the future. Money market traders are currently placing 85% odds on a quarter-point hike on July 26, with approximately a 50/50 chance of another hike by November.
Simultaneously, U.S. Treasury Secretary Janet Yellen embarked on a trip to China as Beijing implemented export restrictions on metals used in semiconductors, signaling that these controls were only the beginning.
“Sentiment has soured for equity bulls as Sino-U.S. relations take another step backwards, and investors adjust to the fact that the Fed remains more hawkish than hoped,” commented Matt Simpson, a market analyst at City Index. He added, “The Fed’s decision to pause was not actually unanimous, and most members are open to further hikes, so this could cap upside over the near-term.” However, considering the current scope of equity declines, it appears to be “more of a bump in the road as opposed to blood on the streets.”
Tokyo trading witnessed ten-year Treasury yields reaching as high as 3.957%, following an overnight surge of 9 basis points. The U.S. dollar index, which measures the currency against six peers, including the euro and yen, extended its gains from Wednesday, rising as much as 0.09% to 103.42 in Asian trading.
Nevertheless, the dollar’s advances against the yen were relatively subdued, despite the traditional close relationship between the currency pair and long-term U.S. yields. On Thursday, the dollar slipped by 0.22% to 144.335 yen, erasing the gains made the previous day.
Japanese officials have been issuing frequent warnings about yen weakness as it approaches the 145 level that triggered intervention last autumn. The dollar briefly touched 145.07 yen on Friday. Naka Matsuzawa, Chief Strategist at Nomura Securities in Tokyo, remarked, “The yen is kind of stuck because the Japanese government has raised the alarm level against the currency. Verbal intervention only works for a couple of weeks without actual currency intervention, and it’s only a matter of time before the yen is going to reach that 145 level” given the rising U.S. yields and the Bank of Japan’s continued dovish stance.
In Asian trading, crude oil saw little change as the prospects of tighter supply resulting from output cuts by Saudi Arabia and Russia, coupled with a larger-than-expected drop in U.S. crude stocks, were offset by concerns over a sluggish demand recovery in China. Brent crude futures dipped by 2 cents to $76.63 a barrel, following a 0.5% increase the previous day. U.S. West Texas Intermediate crude stood at $71.90 a barrel, up 11 cents, or 0.2%, after closing 2.9% higher in post-July 4 holiday trade on Wednesday, aligning with Brent’s earlier gains in the week.
