Asian shares plunged to their lowest level in a month on Tuesday as hawkish remarks from central bankers dampened expectations of interest rate cuts. MSCI’s broadest index of Asia-Pacific shares (excluding Japan) dropped 1%, reaching its lowest level since mid-December. Japan’s Nikkei, after an impressive six-session winning streak, dipped 0.7% away from Monday’s 34-year high. With US markets closed for a holiday, S&P 500 futures dipped 0.4% in Asian trade.
Fed fund futures also fell, reflecting a slight cooling in expectations for interest rate cuts. Additionally, short-term Treasury yields rose, with two-year yields increasing by 6.5 basis points in early Tokyo trade. These movements resulted in the dollar reaching one-month highs, particularly against the risk-sensitive Australian and New Zealand dollars.
European Bonds Sold as ECB Pushes Back on Rate Cut Bets
European bonds experienced a sell-off following statements from European Central Bank officials who pushed back on market expectations of rate cuts. According to Joachim Nagel, President of the Bundesbank, it is too early to discuss cuts, and Austrian central bank governor Robert Holzmann warned that no rate cuts should be expected this year. As a result, money markets scaled back the probability of a 25 basis point ECB cut in March from 40% to 26%. The rise in German bund yields, with two-year yields increasing more than 7 bps to 2.6% and 10-year bund yields rising 5.4 bps to 2.2%, brought support to the euro, which reached a three-week high against the Swiss franc.
The stronger dollar exerted pressure on the euro, causing it to decline approximately 0.3% to a one-week low against the greenback at $1.0918 on Tuesday. Moreover, the Australian and New Zealand dollars both dropped 0.6%. The Australian dollar fell below its 50-day moving average to $0.6620, while the New Zealand dollar dropped to $0.6161.
Impact of Iowa Republican Presidential Contest
The first 2024 Republican presidential contest in Iowa took place on Monday, with Donald Trump winning, as projected by Edison Research. Trump’s victory is expected to create volatility in the markets due to his policy positions and rhetoric. In addition to Trump’s win, market participants were eagerly awaiting Federal Reserve Board Governor Christopher Waller’s speech on the economic outlook at 1600 GMT. Waller’s shift to a more hawkish view in November had significantly boosted market sentiment. Consequently, it is crucial to assess whether Waller will push back on market expectations of a rate cut in March and demonstrate a lack of urgency to normalize policy.
Gold prices remained stable at $2,052 per ounce, holding onto gains from the previous week. On the other hand, iron ore prices in Singapore extended their decline, reaching more than five-week lows. This decline had a negative impact on share prices of Australia-listed mining companies.
Yemen’s Houthi forces attacked a US-owned and operated dry bulk ship with an anti-ship ballistic missile on Monday. However, the oil market did not immediately react, despite the ongoing instability in the shipping lane. Brent crude futures were down slightly at 0.1%, trading at $78.05 per barrel.
On the economic data front, Australian consumer sentiment weakened in January due to concerns over finances fueled by higher mortgage rates. In Japan, wholesale inflation remained flat in December compared to the previous year, marking the 12th consecutive month of slowing inflation. This data may relieve pressure on the Bank of Japan to raise interest rates.
Bitcoin prices remained steady at $42,600, showing no significant movement in the market.
Global markets faced declines as central bankers indicated a more hawkish stance, causing a drop in Asian shares and a rise in the dollar. European bonds also experienced a sell-off as ECB officials pushed back on rate cut expectations. The outcome of the Iowa Republican presidential contest and Fed Governor Waller’s speech were closely watched for potential market implications. Gold prices held steady, iron ore prices declined, and geopolitical tensions in Yemen had no immediate impact on oil prices. Finally, key economic data releases showed negative sentiment in Australian consumer markets and slowing inflation in Japan.
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