Asian equities surge as China pulls back, higher US yields weigh

SYDNEY, March 2 (Reuters) – A rally in Asian stocks sputtered on Thursday, weighed down by a pullback in Chinese stocks and higher US yields amid fears global central banks would continue to raise interest rates to ease stubborn inflation. to fight.

MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) lost 0.3%, reversing some of the 2.1% gain in the previous session – the index’s best day in two months . Japan’s Nikkei (.N225), on the other hand, fell 0.2%.

Hong Kong’s Hang Seng Index (.HSI) fell 1.0% after recording its biggest daily gain of 4.2% in nearly three months the previous day, buoyed by unexpectedly robust data from China’s PMI surveys.

Investor enthusiasm has waned somewhat following China’s economic reopening after Beijing dismantled strict COVID-19 controls in December, as analysts look for more evidence to gauge the pace of economic recovery.

US futures reversed previous gains, with S&P 500 stock futures down 0.5% and Nasdaq futures down 0.7%.

Tesla shares (TSLA.O) fell 5.5% in after-hours trading after the Tesla Investor Day failed to get investors excited. The company will cut the cost of fitting cars in future generations of cars by half, engineers told investors.

“Financial markets are caught between the twin narratives of a softer landing, aided by China’s reopening, and sustained inflation that keeps policy rates high for longer,” said Chris Turner, Global Head of Markets at ING.

“That is likely to keep bond markets in trouble and FX markets to remain volatile.”

Overnight, both bonds and equities took a beating as inflation indicators out of Germany and the United States reinforced expectations that interest rates would go higher and stay that way longer.

Overnight data showed persistent price pressures in Germany did not ease after both Spain and France reported unexpected increases in inflation on Tuesday. German 2-year government bond yields rose to their highest level since October 2008.

In the United States, manufacturing activity contracted for the fourth consecutive month in February, but a commodity gauge rose last month, fueling fears that inflation would remain stubborn.

“The manufacturing PMI data conveys a mixed message for global risk appetite, with improving growth trends positive but lower output prices failing to materialise,” said Alan Ruskin, macro strategist at Deutsche Bank.

“In general, developed markets have a worse balance sheet than emerging markets, in that growth is weaker and inflation more stubborn.”

On Thursday, benchmark yields on 10-year Treasuries hit a new four-month high of 4.0160%, after reaching 4% overnight. The two-year rate also rose to 4.9080%, a new 15-year high.

Investors still expect the Fed to raise rates by 25 basis points at its next meeting later this month, but expectations of a larger 50 basis point hike have increased. The probability that the Fed’s policy rate, currently between 4.5% and 4.75%, would peak above 5.5% was 53%, compared to 41.5% on Feb. 28, according to the CME Fed Tool.

Neel Kashkari, president of the Minneapolis Fed, said he was inclined “to push my policy path” after a recent government report showed the Fed’s target inflation index accelerated to 5.4% year on year in January, more than the double the Fed’s 2% target and slightly faster than the previous month.

In currency markets, the US dollar index, which measures the value of the greenback against a basket of major competitors, rose 0.2% to 104.6.

The euro fell 0.2% to $1.0646, reversing part of an overnight gain of 0.8% as higher-than-expected German inflation increased pressure on the European Central Bank to raise interest rates.

In the crypto world, shares in Silvergate Capital (SI.N) fell as much as 28% after the cryptocurrency-focused bank said it was delaying its annual report and evaluating its ability to operate as an ongoing business.

Oil prices were broadly stable on Thursday, after rising 1% the day before on optimism about China’s recovery. US crude at $77.67 a barrel. Brent oil was broadly unchanged at $84.34 a barrel.

Gold was slightly lower. Spot gold was trading at $1832.53 an ounce.

Reporting by Stella Qiu; Edited by Simon Cameron-Moore

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