MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1 per cent to a one-week low of 486.39, on track for a fourth session of losses and a weekly drop of 0.5 per cent
Asian stocks dropped to their lowest in a week on Friday, while the dollar was steady as higher Treasury yields weighed on sentiment after hawkish comments from U.S. Federal Reserve Chair Jerome Powell dashed expectations of a peak in interest rates.
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1 per cent to a one-week low of 486.39, on track for a fourth session of losses and a weekly drop of 0.5 per cent.
The sombre mood is set to continue as European exchanges open, with futures suggesting a sharply lower open. Eurostoxx 50 futures were 0.73 per cent lower, German DAX futures declined 0.66 per cent and FTSE futures were down 0.78 per cent.
U.S. Fed officials including Powell said on Thursday they are still not sure interest rates are high enough to stop the fight with inflation.
Powell said at an IMF event that the Fed is committed to monetary policy that is sufficiently restrictive to bring inflation down to 2 per cent over time.
We are not confident that we have achieved such a stance, he added.
Powell’s comments along with a weak auction of $24 billion in 30-year Treasuries pushed yields up, casting a shadow on equities and providing support to the dollar.
There is no point in corralling the market into expecting cuts until shortly before they look necessary, said Rob Carnell, Asia-Pacific head of research at ING.
Investors have been looking for signs of U.S. interest rates peaking after the Federal Reserve held rates steady last week, a move that strengthened bets that the rate hiking cycle was over, leading to a short-lived rally in risky assets.
Some investors said Powell’s hawkish leaning on Thursday may have been the result of a recent loosening of financial conditions that has come as yields have declined in recent weeks.
ING’s Carnell said the Fed needs to keep rates and bond yields reasonably up to achieve the tighter financial conditions that will bring about lower inflation and enable the Fed to finally cut rates.
Carnell added that rhetoric has to continue, ‘we are not definitely finished, there is still a chance of more’. You do that right up until the day before you cut.