Asian stocks feel the pain of interest rates, dollar gains

Asian shares fell on Monday as markets anticipated an all-time spike in US and European interest rates, putting pressure on global bonds and pushing the dollar to multi-week highs.

Investors are keen on more challenging US data, including the ISM manufacturing and services gauges.

At least six Federal Reserve policymakers are on the speaker’s agenda this week to offer running commentary on the possibility of further rate hikes.

Productivity surveys are being conducted in China and the National People’s Congress will begin at the weekend, where new economic policy goals and policies will be discussed, as well as a reshuffle of government officials.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5% after losing 2.6% last week. Japan’s Nikkei fell 0.4% and South Korea’s 0.9%.

S&P 500 futures were flat, while Nasdaq futures rose 0.1%. Strong data on spending and key prices saw the S&P 500 breach 4,000 support on Friday, a 61.2% reversal from this year’s rally.

Rates now peak at 5.42%, indicating at least three hikes from the current 4.50% to 4.75%, according to Fed futures. Markets hit record highs for the European Central Bank and the Bank of England.

Bruce Gassmann, head of economic research at JP Morgan, raised the outlook for the ECB by another quarter point to 100 basis points. Germany’s 2-year bond yield broke above 3.0% for the first time since 2008 on Friday.

“The risk is clearly driven by the central bank’s additional measures,” Kasman said.

“Demand has been resilient despite the tightening of supply and ongoing damage from the pandemic, keeping inflation under control,” he added. “The transition to rapid policy change, which is still ongoing, increases the risk of a recession not intended by central banks.”

According to the Atlanta Fed’s influential GDP Now tracker, the US economy grew at an annualized rate of 2.7% in the first quarter, with no slowdown in the December quarter.

High interest rates and yields stretch valuations for stocks, especially those with high PE ratios and low dividend payouts, including much of the technology sector.

US equities trade at a P/E ratio of around 17.5 times forward evenings, versus 12 times for non-US equities.

Ten-year Treasuries offer twice the estimated dividend yield of the S&P 500 index, with much lower risk.

As the earnings season comes to a close, around 69% have delivered a revenue surprise, versus the historical average of 76%, with year-over-year revenue growth of -2%.

The upward shift in central bank expectations was a boon for the US dollar, which rose 1.3% against a basket of currencies last week to 105.220.

The euro settled at $1.0548 after hitting a seven-week low of $1.0536 on Friday.

The dollar hit a nine-week high of 136.40 against the yen on dovish comments from top Bank of Japan policymakers.

The dollar and rising interest rates weighed on gold, which fell 1.7% last week and last traded at $1,812 an ounce. [GOL/]

Oil prices rose slightly as the prospect of lower Russian exports was offset by rising inventories in the US and concerns about global economic activity. [O/R]

Brent was up 35 cents at $83.51 a barrel, while U.S. crude was up 34 cents at $76.66 a barrel.

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