28-6-2023 (HONG KONG) Asian shares exhibited hesitation on Wednesday as investors grappled with conflicting signals from the global economy. Surprisingly positive economic data from the United States clashed with concerns over global growth, creating a sense of uncertainty in the markets. Meanwhile, the embattled yen plummeted to a 15-year low against the euro, prompting Japan to hint at potential intervention to prevent further losses.
The robustness of the US economic data, coupled with hawkish remarks from the European Central Bank (ECB), resulted in a decline in bond prices, as market participants increasingly anticipated additional interest rate hikes.
All eyes turned to a high-profile panel of central bankers scheduled to convene in Portugal later in the day. The esteemed group includes Federal Reserve Chair Jerome Powell, ECB President Christine Lagarde, and Bank of Japan Governor Kazuo Ueda. Their statements and insights on the global economic outlook were eagerly awaited.
“The U.S. data signals continued resilience in interest rate-sensitive sectors, and the Fed is very clear that a period of sub-trend activity may be needed to bring inflation under control,” explained analysts at ANZ. “So far, that doesn’t seem to be happening.”
ANZ analysts also highlighted the ECB’s stance, stating, “Senior officials signalled the need for ongoing tightening unless core inflation slows materially, and a September rate hike is looking increasingly likely.”
The prevailing rate risk contributed to a cautious sentiment in the markets, with MSCI’s broadest index of Asia-Pacific shares outside Japan barely registering any changes. Chinese blue-chip stocks dipped by 0.2%, despite a temporary rebound on Tuesday driven by optimistic growth prospects as discussed by officials.
Japan’s Nikkei index outperformed, rising by 0.7%, primarily aided by the weakness of the yen.
However, Nasdaq futures experienced a 0.4% decline, influenced by a Wall Street Journal report suggesting that Washington was contemplating new restrictions on the export of artificial intelligence chips to China. Nvidia shares fell by 3% in after-hours trading.
S&P 500 futures also slipped by 0.2%, following substantial gains on Tuesday when US data on housing, durable goods orders, and consumer sentiment surpassed expectations.
“The data indicated a firmer pace of residential, inventory, and equipment investment in the second quarter,” wrote analysts at Goldman Sachs. “We boosted our Q2 GDP tracking estimate by 0.4pp to +2.2%.”
The resilience displayed in the US economy counterbalanced recent softness in manufacturing surveys, leading the market to narrow the odds of a July interest rate hike by the Federal Reserve.
Futures now imply a roughly 77% probability of a hike to 5.25-5.5%, with a slightly higher likelihood of a further increase to 5.5-5.75%, thereby pushing short-term Treasury yields higher.
EURO MAKES GAINS
In Europe, bond yields experienced a significant surge as a slew of central bankers adopted a hawkish tone on inflation, signaling that rates might need to remain higher for an extended period. Market indicators suggest a 90% probability of a rate hike to 3.75% in July, with an anticipated peak around 4.0%.
In response, the euro climbed to $1.0957 and reached a 15-year high against the low-yielding yen, peaking at 157.97.
The dollar, on the other hand, reached a near eight-month high of 144.18 yen before retracing to 143.87 as Japanese officials once again expressed their concerns over the yen’s weakness. Japan’s top currency diplomat, Masato Kanda, issued a warning against further yen depreciation, assuring that appropriate action would be taken if the currency’s movements became excessive.
Market participants remain cautious, mindful of the possibility of Japan intervening in the market to bolster the yen, as it did in October last year. During that intervention, the dollar dropped from a peak of 151.94 yen to as low as 144.50 yen within a matter of hours.
However, a yen rally seems unlikely as long as the Bank of Japan maintains its accommodative monetary policy.
“Following BOJ Governor Ueda’s consistently dovish message and weak Japanese wage growth, market participants now lack the conviction that the BOJ will soon tighten its monetary policy,” explained Carol Kong, a currency strategist at CBA. “So we now see a higher risk that Japanese authorities will step into the market to prop up the JPY.”
In the commodities market, gold steadied at $1,915 per ounce after finding support near the recent three-month low of $1,909.99.
Oil prices saw a slight increase after data revealed a larger-than-expected drawdown in US crude and gasoline inventories. However, prices remained uncomfortably close to the year-to-date lows.
Brent crude rose by 33 cents to $72.59 per barrel, while US crude increased by 29 cents to $67.99 per barrel.
