Asian Shares Drop on Risk of More US, EU Rate Hikes

Asian shares slid on Monday as a mounting risk of more aggressive rate hikes in the United States and Europe shoved bond yields and the dollar sharply higher while also stoking fears of a global recession.

Federal Reserve chair Jerome Powell’s promise of policy “pain” to contain inflation quashed hopes that the central bank would ride to the rescue of markets as so often in the past.

The tough-love message was driven home by European Central Bank board member Isabel Schnabel, who warned over the weekend that central banks must now act forcefully to combat inflation, even if that dragged their economies into recession.

That triggered a sharp fall in Euribor futures as markets priced in the risk the ECB could hike by 75 basis points next month and a higher peak for interest rates.

“The main takeaways are taming inflation is job number one for the Fed and the Funds Rate needs to get to a restrictive level of 3.5-4.0%,” said Jason England, global bonds portfolio manager at Janus Henderson Investors.

“The rate will need to stay higher until inflation is brought down to their 2% target, thus rate cuts priced into the market for next year are premature.”

Futures are now pricing in around a 73% chance the Fed will hike by 75 basis points in September and see rates peaking at 3.75% to 4.0% and staying there for longer.

Much might depend on what the August payrolls figures show this Friday. Analysts are looking for a moderate rise of 285,000 following July’s blockbuster 528,000 gain.

The hawkish message was not what Wall Street wanted to hear and S&P 500 futures were down a further 0.9%, having shed almost 3.4% on Friday. Nasdaq futures lost 1.2%, with tech stocks pressured by the outlook for slower economic growth.

China Stocks Slip, Nikkei Down 2.5%

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 2.0%, in the biggest daily drop in two months. Japan’s Nikkei dived 2.5%, and South Korea 2.1%.

Chinese blue chips lost 0.7% in Hong Kong, while the Shanghai Composite slipped 0.14%. Markets in Bangkok and Singapore fell 1.2% and 0.9%, respectively, as investors shied away from riskier assets.

Bourses in South Korea and Taiwan dropped 2.2% and 2.3%, respectively, and led declines in the region.

Australian shares fell by their most in nearly nine weeks, dragged down by losses in miners and banks, as bets of more aggressive rate hikes in the United States soured risk appetite.

The S&P/ASX 200 index settled 2% lower at 6,965.5, snapping three straight sessions of gains. Among individual stocks, Fortescue Metals Group dropped 4.9% in its worst day in more than six weeks after posting a 40% slump in annual profit after a plunge in demand by its top consumer, China.

Indian shares also fell to close at their lowest in a month, weighed down by losses in information technology and banking stocks.

The NSE Nifty 50 index ended down 1.4% at 17,312.90, while the S&P BSE Sensex dropped 1.5% at 57,972.62.

The IT index slumped 3.5%, while the bank index fell 1.8% and the Indian rupee dropped to an all-time low against the dollar, which hit a five-week peak against the yen and was last up 1% at 138.94.

“Energy security fears will remain front and centre this week as Gazprom will shut its mainline pipeline to deliver gas to Western Europe for three days from 31 August to 2 September,” Joseph Capurso, head of international economics at CBA, said. “There are fears gas supply may not be turned back on following the shutdown.”

Those fears saw natural gas futures in Europe surge 38% last week, adding further fuel to the inflation bonfire.

The rise of the dollar and yields has been a drag for gold, which was down at $1,722 an ounce, while oil prices swung higher on speculation OPEC+ could cut output at a meeting on Sept 5.

Brent rose 89 cents to $101.88, while US crude firmed $1.08 to $94.14 per barrel.