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Asian share markets drop after U.S. inflation data

share markets drop

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.1%, while Greater China markets gave up earlier gains

Asian share markets dropped on Friday, after red-hot U.S. inflation data and hawkish comments from a Federal Reserve official fuelled bets on U.S. interest rates being hiked more aggressively, and sent U.S. Treasury yields jumping.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.1%, with most markets in the red. Greater China markets, which had been buoyed by strong credit growth data and resurgence in property stocks, gave up earlier gains.

Japanese markets were closed for a holiday.

An index tracking Hong Kong listed mainland property firms gained 1.7% after a media report that China will allow real estate firms easier access to presale proceeds from residential projects, loosening a liquidity squeeze on the sector.

Broader moves across Asian stocks followed U.S. data on Thursday which showed consumer prices soared 7.5% last month on a year-over-year (YOY) basis, topping economists’ estimates of 7.3% and marking the biggest annual increase in inflation in 40 years.

Sentiment further soured after St. Louis Federal Reserve Bank President James Bullard said the data had made him ‘dramatically’ more hawkish. Bullard, a voting member of the Fed’s rate-setting committee this year, said he now wanted a full percentage point of interest rate hikes by July 1.

Our view is that Asian shares were not as relatively overvalued as U.S. equities so there should be some selective resilience, said Lorraine Tan, Morningstar’s Director of Equity Research in Asia, while adding that the market was still digesting a higher cost of capital than it had been used to.

Tan said: Having said this, we think the market has factored in a rise in 10-year treasuries to 2.0-2.5%. The risk and the fear that will lead to a sharper sell off is if yields move above this level.

The yield on benchmark 10-year U.S. Treasury yield hit 2% for the first time since August 2019, and was last at 2.0346%.

Two-year notes, which typically move in step with interest rate expectations, were yielding 1.5868% having jumped sharply after the CPI data.

That reaction is quite significant when you consider traders were supposedly expecting a 50-year high read on CPI, said Matt Simpson, Senior Market Analyst, City Index.

But with inflation adding a full 2.1 percentage points over the past four months alone, it’s a good job the Fed has ditched the term transitory, Simpson said, noting the U.S. central bank was no longer describing the rise in inflation as a temporary phase.

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