SYDNEY, Feb 27 (Reuters) – Asian stocks hit a two-month low on Monday as markets were forced to price ever-higher spikes in U.S. and European interest rates, sending bonds tumbling globally and supporting the dollar near multi-week highs.
Investors are prepared for more challenging US data, including the closely watched ISM measures of manufacturing and services, the latter of particular importance after January’s surprising spike in activity.
There are also at least six Federal Reserve policymakers on the agenda this week to offer running commentary on the likelihood of further rate hikes.
China has manufacturing investigations and the National People’s Congress kicks off this weekend and will see new economic policy goals and policies, as well as a reshuffle of government officials.
MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) fell 1.0%, after losing 2.6% last week. The Japanese Nikkei (.N225) fell 0.2% and South Korea (.KS11) 1.2%.
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Chinese blue chips (.CSI300) fell 0.2%, while China Renaissance Holdings (1911.HK) rebounded after the mainland’s boutique bank said its missing chairman was cooperating with Chinese authorities in an investigation.
EUROSTOXX 50 futures added 0.1% and FTSE futures added 0.4%.
S&P 500 futures firmed 0.1%, while Nasdaq futures edged up 0.2%. Strong data on spending and core prices saw support for the S&P 500 crack at 4,000 on Friday and retrace 61.2% of this year’s rally.
Fed futures now have rates peaking around 5.42%, implying at least three more hikes from the current range of 4.50% to 4.75%, and a 50 basis point probability in March.
Markets also raised likely rate caps for a host of other central banks, including the European Central Bank and the Bank of England. ,
IT’S A NARROW
Bruce Kasman, head of economic research at JPMorgan, added another quarter-point rise to the ECB’s outlook, taking it to 100 basis points. The yield on German 2-year bonds rose above 3.0% on Friday for the first time since 2008.
“Risk is clearly biased toward greater Fed action,” Kasman says.
“Demand is showing resilience to the tightening and the lingering supply damage from the pandemic is limiting inflation moderation,” he added. “The transmission of the rapid policy change still underway also increases the risk of a recession not wanted by central banks.”
The Atlanta Fed’s influential GDP Now tracker points to 2.7% annualized growth in the US economy in the first quarter, with no slowdown from the December quarter.
Higher rates and yields are stretching stock valuations, especially those with high PE ratios and low dividend payouts, which include much of the tech sector.
US stocks trade at a price to earnings of about 17.5 times forward earnings, compared to 12 times for non-US stocks.
Ten-year Treasury bonds also pay more than double the estimated dividend yield of the S&P 500 index, and with far less risk.
As the earnings season is almost over, about 69% of earnings have surprised on the upside, compared to a historical average of 76%, and annual earnings growth is hovering around -2%.
The upward shift in Fed expectations was a boon for the US dollar, which climbed 1.3% across a basket of currencies last week to last stand at 105.220.
The euro was pinned at $1.0546, after hitting a seven-week low at $1.0536 on Friday.
The dollar hit a nine-week high against the yen to settle at 136.27, helped in part by dovish comments from top policymakers at the Bank of Japan.
The rising dollar and yields have been a drag on gold, which lost 1.7% last week and last stood at $1,810 an ounce.
Oil prices fell as the prospect of lower Russian exports was offset by rising inventories in the United States and worries about global economic activity.
Brent crude fell 33 cents to $82.83 a barrel, while U.S. crude fell 25 cents to $76.07 a barrel.
Reporting by Wayne Cole; Editing by Shri Navaratnam and Sam Holmes
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