Asian stocks experienced a decline on Thursday as central banks worldwide reaffirmed their commitment to combating inflation and hinted at the possibility of further interest rate hikes.
The yen and yuan struggled to recover from their lows due to concerns of potential intervention.
In Europe, the market is expected to open lower, with EUROSTOXX 50 futures and FTSE futures down 0.1%. Wall Street futures, on the other hand, were up 0.1% as investors awaited the release of U.S. Personal Consumption Expenditures (PCE) data on Friday.
The Asia-Pacific region witnessed a 0.5% drop in MSCI’s broadest index of shares outside Japan, with trading volumes impacted by public holidays in Singapore, India, and Malaysia.
Chinese blue chips fell 0.3%, and Hong Kong’s Hang Seng index slumped 1.3%. In contrast, Japan’s Nikkei gave up earlier gains but managed to stay up 0.1%.
The onshore yuan remained weak at 7.2491 per dollar, coming close to an eight-month low. This occurred despite a stronger-than-expected central bank fixing, which investors interpreted as an attempt to stabilize the currency’s weakness.
According to Shane Oliver, the chief economist at AMP in Sydney, he remarked that the depreciation of the currency may not be of great concern to the People’s Bank of China since it aids in bolstering the growth of the Chinese economy.
However, he also noted that excessive and rapid depreciation could give the impression of a panicked response.
The central bank may attempt to mitigate the rapid decline, but it is akin to fighting against the natural course of events, comparable to battling the receding tide.
In the U.S., the stock market remained relatively flat, with the Nasdaq managing a slight gain supported by tech stocks, including Apple, which reached a record high. The Dow, however, closed slightly lower.
Federal Reserve Chair Jerome Powell’s statement that the central bank would likely continue raising rates, with the possibility of a July hike, did not come as a surprise to the market.
Powell also noted that he did not expect inflation to reach the 2% target until 2025. Despite the hawkish message, share markets did not experience significant declines, as Oliver explained.
Two-year Treasury yields briefly spiked to 4.778% but closed at 4.722%, indicating some skepticism in bond markets regarding the Fed’s hawkish stance on two more rate hikes. On Thursday, the yields rose by 2 basis points to 4.7451%.
Futures suggest an 80% chance of the Fed raising interest rates by 25 basis points in July, followed by a steady rate for the rest of the year.
In contrast, European Central Bank President Christine Lagarde has solidified expectations for a ninth consecutive rate hike in the eurozone in July. The market has already factored in two more rate hikes by the ECB this year.
Bank of Japan (BOJ) Governor Kazuo Ueda reiterated that the BOJ still had a distance to go in achieving sustainable 2% inflation, the condition required for considering an exit from the ultra-easy stimulus.
The BOJ’s dovish policy stance has contributed to the yen’s decline, which was down 0.1% on Thursday, nearing an eight-month low.
There are concerns in the market regarding potential intervention by Japanese authorities due to increased verbal warnings from government officials about the rapid decline of the yen.
Investors are eagerly awaiting the U.S. PCE index, the Federal Reserve’s preferred inflation gauge, which will be released on Friday. Analysts predict the core rate to be 4.7% on a year-over-year basis, well above the Fed’s 2% target.
In conclusion, global markets remain on edge as central banks navigate the challenges of rising inflation and the potential need for further interest rate adjustments.
Investors are closely monitoring economic indicators and policy decisions, including the upcoming release of the U.S. PCE index.
The outcome of these developments will significantly impact the trajectory of financial markets and shape investment strategies in the months to come.
