SINGAPORE, April 19 — Stocks sagged in cautious trade today, while the dollar paused its recent decline as expectations for an imminent peak in the Federal Reserve’s interest rate cycle edged ahead of US banking sector concerns.

MSCI’s index of Asia shares outside Japan dropped 0.4 per cent to retreat further from Monday’s two-month high, and Japan’s Nikkei looked set to snap an eight-day winning streak with a modest 0.3 per cent loss.

S&P 500 futures fell 0.2 per cent and European and FTSE futures were flat, ahead of British and European inflation data and Tesla earnings figures due later in the day.

Morgan Stanley also reports, on the heels of solid earnings at rivals that seem to have soothed market concerns about the sector’s stability.

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“So far the major banks that have reported have largely helped to settle market nerves,” said Khoon Goh, head of Asia research at ANZ in Singapore. “With those stresses easing away, markets are now back to focusing on the Fed.”

A slew of Federal Reserve speakers are in the frame over the rest of this week ahead of the pre-meeting blackout period that begins on the weekend.

The Fed’s “beige book” of economic conditions is published today and appearances are due from Chicago Fed President Austan Goolsbee and New York Fed President John Williams.

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Markets are pricing an 86 per cent chance the Fed raises rates by 25 basis points at the May meeting, and are winding back expectations of cuts later in the year — moves that have put the brakes on US dollar selling.

Still, the inversion between three-month Treasury yields and 10-year yields, at more than 160 bps, is the deepest since 1981 when the Fed funds rate was climbing down from peak of 19 per cent — suggesting markets expect rates to fall.

Ten-year yields were last at 3.5813 per cent.

Surface calm

The lack of big picture drivers in the Asia session left traders to look at earnings and ahead to economic data.

Dutch-listed chip equipment maker ASML beat first-quarter profit expectations, according to Refinitiv data. British and European inflation figures are due later in the day with currency markets delicately poised.

The winding back of rate cut expectations for the US has given a floor to the dollar, but pressure on central banks in Britain and Europe to carry on hiking for some time has their currencies grinding higher.

Sterling hit a 10-month high of US$1.2545 (RM5.56) last week and bounced with strong wages data yesterday. It was last at US$1.2420. The euro hit a one-year high above US$1.10 last week and lurked at US$1.0969 in Asia trade today.

“Lower rate volatility and reduced expectations for Fed rate hikes should put the broad US dollar in a weaker position,” HSBC analysts said in a currency outlook note.

“If anything, there could be a continued focus on short-end US Treasury yields being lower than the Fed’s policy rate and how this was a precursor to it easing in the past.”

Elsewhere, Brent crude futures were steady at US$84.52 a barrel, roughly where they have traded for a few weeks since Opec+ announced surprise production cuts. Gold held above US$2,000 an ounce and bitcoin above US$30,000.

Citi strategist Matt King warned that the markets’ calm may be shortlived as central banks’ efforts to soothe worries about systemic bank risks start to wear off.

“Consensus holds that strong year-to-date risk performance stems from the genuine improvements in the economic outlook,” he said.

“But a better explanation is the injection of over US$1 trillion in central bank liquidity. This held down real yields, propped up equity multiples, and tightened credit spreads in the face of falling earnings expectations. High-frequency liquidity indicators suggest this is already stalling.” — Reuters