- Nikkei falls, S&P futures up an inch
- Higher spike seen for Fed rates, dollar support
- US ISM surveys, Chinese PMIs in focus
SYDNEY, Feb. 27 (Reuters) – Asian stocks hit their two-month lows on Monday as markets were forced to price in ever-higher spikes in US and European interest rates, trailing global bonds and supporting the dollar near highs of several weeks.
Investors are bracing for more challenging US data, including the closely watched ISM manufacturing and services readings, which are especially important after the surprise spike in activity in January.
There are also at least six Federal Reserve policymakers on the speaking agenda this week to provide ongoing commentary on the likelihood of further rate hikes.
China has manufacturing surveys and the National People’s Congress starting over the 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) was down 1.0%, after losing 2.6% last week. Japan’s Nikkei (.N225) eased 0.2% and South Korea (.KS11) 1.2%.
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China’s blue chips (.CSI300) fell 0.2%, while China Renaissance Holdings (1911.HK) rallied after the mainland boutique bank said the missing chairman is cooperating with Chinese authorities in an investigation.
EUROSTOXX 50 futures added 0.1% and FTSE futures added 0.4%.
S&P 500 futures rose 0.1%, while Nasdaq futures rose 0.2%. Strong data on spending and core prices caused the S&P 500 to crack support at 4,000 on Friday and pull back 61.2% from this year’s rally.
Fed futures now have rates peaking around 5.42%, implying at least three more increases from the current range of 4.50% to 4.75%, and some chance of 50 basis points in March.
Markets have also pushed up likely rate hikes for a host of other central banks, including the European Central Bank and the Bank of England. ,
IT’S A STRETCH
Bruce Kasman, head of economic research at JPMorgan, has again raised the ECB’s outlook by a quarter point to 100 basis points. German 2-year bond yields broke above 3.0% for the first time since 2008 on Friday.
“The risk is clearly directed at more action from the Fed,” says Kasman.
“Demand is proving resilient despite the tightening and the ongoing damage to supply from the pandemic limits inflation moderation,” he added. “The transfer of the rapid policy change that is still underway also increases the risk of a recession not intended by central banks.”
The Atlanta Fed’s influential GDP Now tracker shows that the US economy grew at an annualized rate of 2.7% in the first quarter, showing no slowdown from the December quarter.
Higher rates and yields are driving up valuations for stocks, especially those with high PE ratios and low dividend payouts, including much of the technology sector.
US equities trade at a price/earnings multiple of approximately 17.5 times forward earnings, compared to 12 times for non-US equities.
Ten-year government bonds also yield more than twice the estimated dividend yield of the S&P 500 index, and with much less risk.
With earnings season almost over, about 69% of earnings surprised positively, compared to a historical average of 76%, and annual earnings growth is about -2%.
The upward shift in Fed expectations has been a boon for the US dollar, which climbed 1.3% last week on a basket of currencies to eventually reach 105,220.
The euro was stuck at $1.0546 after hitting a seven-week low of $1.0536 on Friday.
The dollar made a nine-week high against the yen, eventually trading at 136.27, aided in part by easing comments from top policymakers at the Bank of Japan.
The rise in the dollar and yields has been a drag on gold, which lost 1.7% last week and was most recently 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 concerns about global economic activity.
Brent fell 33 cents to $82.83 a barrel, while US crude fell 25 cents to $76.07 a barrel.
Reporting by Wayne Cole; Edited by Shri Navaratnam and Sam Holmes
Our Standards: The Thomson Reuters Principles of Trust.
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