Asian stocks ease, major test looms for UK bonds

  • https://tmsnrt.rs/2zpUAr4
  • Nikkei down 1.4%, S&P 500 recovers slightly after its fall
  • Focus on gilts as BoE buying ends, Truss future uncertain
  • Dollar close to 149 yen, market wary of intervention

SYDNEY, Oct 17 (Reuters) – Asian stock markets fell on Monday after another beating for Wall Street as investors braced for another drastic tightening in global financial conditions, with all the risks of recession that that entails.

Financial stability concerns have added to the corrosive mix with all eyes on UK bonds now that the Bank of England’s (BoE) emergency buying spree has ended.

Prime Minister Liz Truss’ decision to fire her finance minister could help reassure investors, but her own fate is unclear, with media reporting that Tory lawmakers will try to replace her this week.

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BoE Governor Andrew Bailey warned over the weekend that interest rates may now have to rise more than expected just a few months ago.

“The BoE was making emergency bond purchases that are technically identical to QE with one hand, while furiously raising the policy rate with the other,” ANZ analysts said in a note.

“Monday’s market action will provide a test, not only for the survival of Truss’s low-tax vision, but also for his political future.”

The pound was quoted up 0.4% at $1.1219, but off the initial high with sparse trading in Asia. FTSE futures fell 0.5% and EUROSTOXX 50 futures fell 0.6%.

MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) fell 1.2% and fell back to last week’s low in 2½ years.

The Japanese Nikkei (.N225) lost 1.4% and South Korea (.KS11) 0.1%. Chinese blue chips (.CSI300) fell 0.4% ahead of Tuesday’s GDP data.

S&P 500 futures edged up 0.4% after Friday’s sharp decline, while Nasdaq futures added 0.3%.

With the S&P 25% off its peak, BofA economist Jared Woodard has warned the fall is not over as the world moves from two decades of 2% inflation to a period of something like 5% inflation.

“$70 trillion in ‘new’ tech, growth and government bond assets at the price of a 2% world are vulnerable to these secular shifts as ‘old’ industries like energy and materials are increasing, reversing decades of underinvestment,” he wrote in a note.

“Rotating proxies 60/40 and buying what’s scarce – power, food, energy – is the best way for investors to diversify.”

MONITORING OF INTERVENTIONS

A scorching consumer price report in the United States and rising inflation expectations have markets expecting the Federal Reserve to hike rates by 75 basis points next month, and likely by more. same way in December.

A host of Fed policymakers are speaking this week, so there will be plenty of opportunities for hawkish headlines. The earnings season also continues with reports from Tesla Inc (TSLA.O), Netflix (NFLX.O) and Johnson & Johnson (JNJ.N), among others.

Goldman Sachs Group Inc (GS.N) also reported this week and the WSJ reported that the investment bank plans to restructure its largest businesses into three divisions.

In China, the Communist Party Congress is expected to grant President Xi Jinping a third term, while there could be a reshuffling of key economic roles as incumbents approach retirement age or term limits.

In the foreign exchange markets, the dollar remains king as investors value US rates peaking at around 5%.

The yen has been particularly hard hit as the Bank of Japan sticks to its easy policy, while the authorities refrained from intervening last week even as the dollar rose above the 148.00 level to reach 32-year highs.

Early Monday, the dollar was up at 148.73 yen and heading towards the next target at 150.00.

The euro was holding at $0.9733, after posting a more stable performance last week, while the US dollar index fell slightly to 113.20.

Rising dollar and global bond yields were a drag on gold, which was stuck at $1,648 an ounce.

Oil prices were trying to rebound, after falling more than 6% last week, as fears of a slowdown in demand trumped OPEC’s plans to cut production.

Brent crude firmed 64 cents to $92.27 a barrel, while U.S. crude rose 55 cents to $86.16 a barrel.

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Reporting by Wayne Cole; Editing by Himani Sarkar, Ana Nicolaci da Costa and Muralikumar Anantharaman

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