Image: Reuters Berita 24 English - On Wednesday, Asian markets were in a contemplative mood as shell-shocked investors awaited the Federal...
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| Image: Reuters |
Berita 24 English - On Wednesday, Asian markets were in a contemplative mood as shell-shocked investors awaited the Federal Reserve's rate decision, with many fearful that harsh action might plunge the world into recession.
Treasury yields soared to decade highs, and the dollar reached a 20-year high, as futures predicted the Fed would boost rates by 75 basis points to a range of 1.50-1.75 percent later on Wednesday.
This would be the largest increase since 1994, with markets now predicting rates of 3.75-4.0 percent by the end of the year.
"The S&P 500 has had its worst start to the year since 1962, against a backdrop of sky-high inflation, increasing rates, and intensifying recession concerns," according to Goldman Sachs analysts.
"An impending peak in inflation is unlikely to signal the bottom, and analogous previous drawdowns have only finished when the Fed has turned to looser policy."
Because that may be some time away, they advise investors to shorten the term of their portfolios and increase their exposure to real assets.
With so much already factored in, a few daring investors looked for bargains early Wednesday, and S&P 500 futures jumped 0.4 percent, while Nasdaq futures rose 0.6 percent. The EUROSTOXX 50 futures increased by 0.3 percent, while the FTSE futures increased by 0.2 percent.
MSCI's broadest index of Asia-Pacific stocks outside of Japan rose 0.2 percent, but is still down substantially from the previous week.
The Nikkei 225 index in Japan fell 0.6 percent, despite a survey suggesting an increase in confidence among Japanese manufacturers.
Although data on Chinese retail sales and industrial output for May were slightly better than expected, the impact of coronavirus lockdowns remained.
Beijing officials warned on Tuesday that the city of 22 million people was in a "race against time" to contain the pandemic's most dangerous outbreak since it began.
Bond markets have recovered a little following their recent thrashing, with 10-year Treasury rates falling to 3.43 percent from a high of 3.498 percent on Tuesday.
Two-year rates were at 3.38 percent, up from 3.456 percent overnight, which was the highest since 2007. Because many U.S. borrowing rates are related to yields, financial conditions in the United States have already tightened significantly prior to the Fed's hikes.
THE YIELD ADVANTAGE IS WITH THE DOLLAR.
Treasury yields are also used as a benchmark for bonds all around the world, thus financial conditions are tightening globally. This is a significant drag on consumer purchasing power, as well as a source of pressure on emerging market countries that borrow in dollars.
It has also tended to enhance the value of the US dollar, which has risen to a 20-year high versus a basket of currencies, boosted by large gains in the low-yielding Japanese yen.
The dollar was trading at 135.27 yen, up from its previous high of 135.60 in 1998.
The most recent jump occurred after the Bank of Japan increased its asset purchases to keep rates near zero, even as the rest of the world tightened policy.
The euro was trading at $1.0440, not far from its low of $1.0348 seen in May.
The euro has benefited from the European Central Bank's hawkish stance, but it is being pulled down by signs of stress in local bond markets. Yields for more indebted nations, particularly Italy, have risen far faster than yields for Germany, fueling fears of EU fragmentation.
Rising yields and a strong dollar have been a drag on gold, which is trading at $1,816 an ounce, near its lowest level in a month. [GOL/]
Oil prices rose somewhat as the Organization of Petroleum Exporting Countries (OPEC) confirmed that global oil consumption will approach pre-pandemic levels in 2022. [O/R]
Brent was up 22 cents to $121.39 per barrel, while US crude was up 20 cents to $119.13 per barrel.
