Asia kicks off the last week of the quarter on Monday, with markets badly bruised by the surge in U.S. bond yields following the Federal Reserve’s hawkish pause last week and investors looking to get through the week without any further whiplash. They will be hoping for some sort of bounce, even if it’s only of the dead cat variety, from the most turbulent week since the U.S. regional banking shock in March.
The Impact of U.S. Bond Yields
This may hinge largely on whether the U.S. bond market regains its footing. Benchmark two- and 10-year Treasury yields are the highest since 2006-07, 10-year real yields have broken above 2%, and asset markets around the world are buckling under the higher-for-longer U.S. rate outlook. The dollar is strengthening as a result, and as emerging market investors are all too aware, the combination of high U.S. debt servicing costs and a strong dollar are rarely a welcome combination. Financial conditions across emerging markets are the tightest in 11 months, according to Goldman Sachs.
The Power and Influence of the U.S. Central Bank
In some ways, the global market sell-off after the Fed’s new rate projections were released on Wednesday was remarkable, and highlights the power of the U.S. central bank over all others. Yes, the Fed sent out a hawkish signal. But the Bank of England, Swiss National Bank and Bank of Japan last week were surprisingly dovish, the euro zone and Chinese central banks are also leaning dovish, Brazil’s is slashing rates, and many others have stopped hiking. On balance, the global policy picture is pretty dovish, with one notable exception. Yet markets still cratered.
The MSCI Asia ex-Japan Index lost 2.3%, its biggest fall in five weeks, the S&P 500’s 2.67% slide was its steepest fall since March, the Dow Jones Industrial Average’s 12-basis point rise was its biggest weekly rise since July and it has now risen eight weeks out of the last 10. The MSCI Asia ex-Japan Index is on track for a 3% loss over the July-September period, its second quarterly loss in a row and seventh out of the last nine.
Upcoming Economic and Policy Calendar
The Asian economic and policy calendar on Monday is relatively light with a batch of indicators from Vietnam – including inflation, trade and third-quarter GDP – and Singapore inflation the main data points. The Bank of Thailand’s latest policy decision is on Wednesday, and activity really picks up on Friday with a heavy slew of data from across the region which spills into the weekend with China’s official and non-official purchasing managers index reports for September.
The surge in U.S. bond yields is casting a dark shadow on the quarter-end for markets in Asia. With the highest Treasury yields in more than a decade and tightening financial conditions for emerging markets, investors are looking for a bounce in the market to ease the turbulence. The power and influence of the U.S. central bank are evident as global markets react strongly to the Fed’s hawkish signal. Despite the dovish stance of many other central banks, markets continue to fluctuate. The upcoming economic and policy calendar in Asia will provide further insight into the state of the region’s economies. However, uncertainty remains as the market reels from the surge in bond yields and the potential consequences of high U.S. debt servicing costs and a strong dollar.