© Reuters. FILE PHOTO: An electronic stock quote board is displayed inside a conference hall in Tokyo, Japan, November 1, 2021. REUTERS/Issei Kato
TOKYO (Reuters) – Asian shares took a hit on Friday after a fresh round of hawkish comments from Federal Reserve officials cemented expectations that U.S. interest rates could be raised as early as March, preparing markets for tighter monetary conditions .
Federal Reserve Governor Lael Brainard became the newest and most senior U.S. central bank governor on Thursday, saying he would raise interest rates in March to fight inflation.
Stocks turned deep red, with MSCI’s broadest index of Asia-Pacific shares outside Japan down 0.9% in afternoon trade, while Australia lost 1.1% and gave up 1.3%.
South Korean stocks fell 1.4% after the Bank of Korea raised its benchmark interest rate by 25 basis points to 1.25% on Friday, as expected, in an attempt to rein in consumer price gains and return them to pre-pandemic levels.
China’s blue-chip index fell 0.5% and Hong Kong’s index fell 0.9%.
“Everyone is very nervous right now. That’s because everything could be under pressure from aggressive Fed policy,” said Kyle Rodda, a market analyst at IG in Melbourne.
“Hopefully this will be a slow and easy handover to normal policy,” he added. “But with the Fed so focused on inflation, that’s not necessarily guaranteed.”
Federal Reserve Governor Christopher Waller, who has repeatedly called for a more aggressive response to high inflation, said late Thursday that the U.S. may need to raise interest rates four to five times quickly if inflation doesn’t subside.
Data on Wednesday showed U.S. inflation, as measured by the consumer price index, surged 7.0% in December, the largest year-on-year gain in nearly 40 years.
In the bond market, yields were at 1.720%, well below Monday’s two-year highs, suggesting investors were more inclined to the safety of government bonds over volatile tech and growth stocks.
Reuters reported that Bank of Japan policymakers were debating how soon they could start raising interest rates eventually, helping push up the yen and Japanese government bond (JGB) yields.
The five-year JGB yield touched -0.015%, the highest since the Bank of Japan adopted negative interest rates in January 2016.
The yen, which has traditionally attracted safe-haven demand, was last trading at 113.70 after hitting its highest level against the dollar in 3-1/2 weeks.
Separate data showed Japan’s wholesale inflation rose 8.5 percent in December from a year earlier, the second-fastest pace on record, suggesting rising raw material and fuel costs are squeezing corporate profit margins.
IG’s Rodda said the market was facing more persistent risks to growing safe-haven demand, especially in key events involving U.S. central bank policy and U.S. data.
“This is a problem because arguably every asset is inflated by easy monetary policy,” he added.
“Every asset must be revised to reflect higher or tighter monetary policy.”
After hitting a two-month low, it was down 0.1 percent at 94.638, boosted by a stronger euro, which hit a fresh two-month high of $1.1482.
In commodities markets, gold rose 0.3% to $1,827 an ounce, but was still below its January peak of $1,831.
Oil futures remained weak on expectations that Washington may act soon to cool prices above $80 a barrel, while restrictions on China’s actions to contain the COVID-19 outbreak weighed on fuel demand. [O/R]
It was almost flat at $84.49 a barrel, while down 18 cents at $81.95.