Asian stocks, oil prices fall sharply as inflation concerns mount

Investors fear a swift consumer demand rebound coupled with trillions of dollars in stimulus measures may drive up inflation.

China's blue chip share index shed 1.9 percent, perhaps unnerved by a fiery exchange between Chinese and US diplomats at the first in-person talks since US President Joe Biden took office [Qilai Shen/Bloomberg]

Asian share markets slipped on Friday after a spike in global bond yields soured sentiment towards richly priced tech stocks, while concerns that a recent run-up in oil prices may not be fully justified by the level of demand sent crude tumbling overnight.

Having plunged 7 percent in London and New York, Brent crude futures managed a feeble bounce of just 11 cents to $63.39 a barrel, while United States crude added 6 cents to $60.06.

The retreat wiped out four weeks of gains in a single session.

Financial markets were also unsettled by the Bank of Japan’s (BOJ) decision to slightly widen its target band for 10-year government bond yields and tweak its buying of assets.

The bank portrayed the changes as a “nimble” way to make monetary easing more sustainable, though investors seemed to take it as a step back from all-out stimulus.

The BOJ’s decision to confine its purchases of exchange-traded funds to those linked to the TOPIX index knocked the benchmark Nikkei stock index down 1.6 percent, while South Korea lost 1 percent. MSCI’s broadest index of Asia Pacific shares outside Japan followed with a fall of 1.5 percent.

Chinese blue chips shed 1.9 percent, perhaps unnerved by a fiery exchange between Chinese and US diplomats at the first in-person talks since US President Joe Biden took office.

Nasdaq futures were flat, after a sharp 3 percent drop overnight, while S&P 500 futures added 0.1 percent. European futures followed the overnight fall with the EURO STOXX 50 down by 0.8 percent and FTSE futures 0.6 percent lower.

Nasdaq index chart [Bloomberg]

Fed vs markets

Investors are still reflecting on the US Federal Reserve’s pledge to keep interest rates near zero through to 2024 even as it lifted forecasts for economic growth and inflation.

Federal Reserve Chair Jerome Powell seems likely to drive home the dovish message next week with no less than three appearances lined up.

“Stronger growth and higher inflation but no rate hikes is a potent cocktail for risk assets and equity markets,” said Nomura economist Andrew Ticehurst.

Yields on US 10-year Treasury bonds spiked to the highest since early 2020 at 1.754 percent and were last at 1.71 percent. If sustained, this would be the seventh straight week of increases, adding a huge 64 basis points in total.

The drastic bearish move in bonds reflects the risk that the Federal Reserve is serious about keeping short-term rates low until inflation accelerates, so requiring longer-term bonds to offer fatter returns to compensate.

The latest BofA survey of investors showed that rising inflation and the bond “taper tantrum” had replaced COVID-19 as their number one risk.

While still very bullish on economic growth, company earnings and stocks, respondents feared a sharp setback for equities should 10-year yields rise above 2 percent.

Firmer dollar

The jump in Treasury yields provided some support to the US dollar, though analysts fret that faster US economic growth will also widen the current account deficit to levels that will ultimately drag on the currency.

For now, the dollar index bounced to 91.853, from a low of 91.30 to leave it slightly firmer for the week.

The US dollar steadied against the low-yielding yen at 108.91, just off the recent 10-month top of 109.36. The euro eased back to $1.1914.

The rise in bond yields has weighed on gold, which offers no fixed return, and left it down 0.2 percent at $1,731 an ounce.

Source: Reuters