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Stocks in Asia struggled to gain traction and US equity futures fluctuated as negative sentiment persisted in markets amid fear that global central banks will keep hiking rates until inflation is tamed, raising the risk of a recession.
Equities made small gains in Japan and dropped in Hong Kong and Australia. Trading in Asia may be muted by a holiday in Sydney and South Korea yesterday and the week-long closure of Chinese markets for Golden Week.
Oil surged to trade near US$82 a barrel on indications the OPEC+ alliance is considering slashing production by more than 1 million barrels a day to revive plunging prices when it meets this week.
Commodity currencies gained. Those moves increase the risk of more inflation that may prompt central banks to take further aggressive policy action.
Shorter Treasury yields fell more than longer ones in a so-called bull-steepening, with the yield on two-year notes at around 4,2 percent and the 10-year at about 3,8 percent. The dollar fell slightly.
The week’s cautious start comes after US stocks posted their third straight quarter of losses for the first time since 2009. Risk assets have been in a tailspin since the Federal Reserve delivered a third jumbo hike last month and officials repeatedly warned of more pain to come.
“Risk off seen from multiple forces heading into the new month or quarter as corporate earnings misses continue to raise the threat of an ugly earnings season ahead,” a group of Saxo Capital Markets analysts wrote in a note.
Confidence among Japan’s large manufacturers unexpectedly worsened for three straight quarters following the yen’s rapid depreciation and deterioration in the global economic outlook, adding another headwind for local equities.
Brazil-linked global assets will be in focus yesterday as the country’s presidential election is headed to a run-off vote on October 30.
Traders are also closely watching the turmoil in the UK and the developments surrounding Credit Suisse Group after its new chief sought to calm the markets following a climb in its default swaps.
Prime Minister Liz Truss put the blame for the controversial decision to remove the highest rate of UK income tax on Chancellor of the Exchequer Kwasi Kwarteng, but the government intends to follow through with the plan despite the market chaos.
The pound fell for the first time in five days and European stock contracts lost more than 2 percent yesterday amid thin volumes.
“Last week’s developments reinforced our expectation that we will see further tightening in financial conditions, but also illustrated the short-term two-way volatility, which will likely accompany it,” Citigroup Global head of currency analysis Ebrahim Rahbari wrote in a note to clients. With the three main forces at play — rising real rates, volatility and the US dollar — “we therefore remain very bearish regarding the outlook for global risk assets,” he wrote.
Investors are now awaiting jobs data this week for further clues about the Fed’s rate-hike trajectory. Upcoming inflation and GDP readings will also provide details on whether price pressures are easing meaningfully. Rate decisions in Australia and New Zealand are also expected, with the antipodean markets considered bellwethers for developed market peers.
Geopolitical tensions also continue to simmer as Russian forces faced a new operational defeat — this time in a strategic eastern Ukrainian town — to cast further doubt on the “forever” annexation of four occupied regions by President Vladimir Putin that he vowed was irreversible.
President Joe Biden declared that a massive leak from the Nord Stream gas pipeline system in the Baltic Sea was an intentional act. — Bloomberg.
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