Asian stocks drop on hawkish Fed comments, dollar holds steady amidst rising treasury yields

Asian stocks experienced a week-low on Friday, with the dollar maintaining stability amid elevated Treasury yields. This downturn followed hawkish remarks from U.S. Federal Reserve Chair Jerome Powell, shattering expectations of an imminent peak in interest rates.

The MSCI’s broadest index of Asia-Pacific shares outside Japan dropped by 1% to reach a one-week low of 486.39, marking a fourth consecutive session of losses and a weekly decline of 0.5%.

The bearish sentiment is anticipated to persist in Europe as futures point towards a significantly lower opening. Eurostoxx 50 futures declined by 0.73%, German DAX futures by 0.66%, and FTSE futures by 0.78%.

Federal Reserve officials, including Powell, expressed uncertainty on Thursday about whether interest rates are high enough to combat inflation effectively. Powell stated at an International Monetary Fund event that the Fed is committed to implementing monetary policies sufficiently restrictive to bring inflation down to 2% over time but emphasized their lack of confidence in achieving this stance.

Powell’s comments, coupled with a weak auction of $24 billion in 30-year Treasuries, led to higher yields, casting a shadow on equities and lending support to the dollar.

Some investors speculated that Powell’s hawkish stance might be a response to the recent easing of financial conditions amid declining yields in recent weeks.

Carnell emphasized the need for the Fed to maintain reasonably high rates and bond yields to achieve tighter financial conditions, leading to lower inflation and eventually allowing the Fed to cut rates.

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Major U.S. stock indices closed lower on Thursday, ending the Nasdaq and S&P 500’s longest winning streaks in two years, as optimism over looser monetary policy waned.

U.S. rate futures now indicate a 60% chance of a rate cut at the Fed’s June 2024 meeting, down from about 70% before Powell’s speech.

Chinese stocks dropped by 0.6%, while Hong Kong‘s Hang Seng Index fell by 1.6% amid concerns about the world’s second-largest economy. Data on Thursday showed consumer prices in China contracted.

The yield on 10-year Treasury notes eased by 1.2 basis points to 4.618%, following a 12 basis point gain on Thursday, the largest one-day increase in three weeks.

In the currency market, the dollar index maintained its overnight gains, reaching 105.89. The dollar stood near a one-year high at 151.40 yen and touched one-week highs against the Australian and New Zealand dollars.

U.S. crude rose by 0.38% to $76.03 per barrel, and Brent was at $80.39, up 0.47% on the day. The oil market faced challenges this week due to demand concerns, triggering a sell-off as the war-risk premium diminished.

Spot gold remained largely unchanged at $1,956.80 per ounce, on track for its worst week in over a month, down by 1.8%, influenced by elevated yields and a stronger dollar.