SINGAPORE, Dec 6 — Asian stocks retreated from three-month highs and the dollar held on to gains following strong US data that again suggested the Federal Reserve might stick longer with aggressive interest rate increases.
While investors remained hopeful of China’s economy improving with the easing of the country’s zero-Covid policy, analysts said markets had already priced in a lot of the upbeat news.
MSCI’s broadest index of Asia-Pacific shares outside Japan shed 0.4 per cent, after climbing to a three-month high in the previous session. The benchmark has gained 21 per cent from October lows on persistent chatter about China easing pandemic measures.
Stocks in Korea and Taiwan traded lower, while China’s broader index rose 0.6 per cent and Japan and Hong Kong stocks were steady.
Today’s muted performance in Asian equities came after global stocks and Treasury prices fell yesterday as new evidence of a strong US economy raised expectations that interest rates would stay higher for longer.
“The black swan in the room is the risk of the Fed being too late again, but this time in cutting rates,” said Havard Chi, head of research at hedge fund Quarz Capital Asia.
“Monetary policy works with a lag and key spot indicators such as falling housing prices, rental rates, commodities, and freight pricing as well as rising layoffs and inventories are already signalling a weakening US economy,” said Chi.
US services industry activity unexpectedly picked up in November and employment rebounded. It was the latest data showing economic momentum that could push the Federal Reserve to tighten policy further, and it followed a robust US payrolls report for November.
Futures show the market expects US short-term interest rates to peak at 5.001 per cent in May. The expectation is about 9 basis points higher than it was last week. By December 2023, the rates will have declined to 4.574 per cent, according to futures markets.
Yesterday, the Dow Jones Industrial Average fell 1.4 per cent, the S&P 500 lost 1.79 per cent and the Nasdaq Composite dropped 1.93 per cent.
Data in Europe was still downbeat. Euro zone business activity declined for a fifth month in November, final PMI data showed, suggesting the economy was sliding into a mild recession.
Oil prices edged up, after a G7 price cap on Russian seaborne oil came into force yesterday on top of a European Union embargo on imports of Russian crude by sea.
Brent crude futures ticked up 0.9 per cent to US$83.4 a barrel. Futures fell more than 3 per cent in the previous session after the US economic data.
The dollar stayed firm versus major peers, following its biggest rally in two weeks yesterday, which was helped by the strong US services data.
The Australian dollar was stuck near a one-week low ahead of a central bank rate decision, with market participants watching for signs of a pause in tightening after inflation unexpectedly cooled last month.
Treasury yields rose on expectations the Fed would continue to raise rates well into next year, though at a slower pace. — Reuters
