Asian stock markets have put an end to an eight-day losing streak, driven by a rebound in undervalued Chinese shares. Meanwhile, benchmark Treasury yields have surged to 16-year highs due to concerns about sustained high-interest rates.
The Asia-Pacific shares index, excluding Japan, surged 0.9% in mid-afternoon trading, with the Hang Seng leading the charge with a 1.3% surge. Japan’s Nikkei also rose by 0.9%, benefiting from positive momentum from Wall Street’s performance on Monday.
In the early Tokyo trading hours, benchmark 10-year yields climbed 2.5 basis points to reach 4.366%, marking the highest level since 2007. Yields have risen by nearly 40 basis points for the month thus far. This rise in yields is concurrent with the decline in bond prices and comes after upbeat U.S. economic news, which has led investors to lower their expectations of policy easing in the coming year.
These concerns about higher interest rates and uncertainties surrounding China’s economic performance have dented investor appetite for stocks. However, Tuesday’s trading brought about a mild rebound.
S&P 500 futures turned positive during the Asian trading day, edging up by 0.1%. European and FTSE futures followed suit with increases of 0.6% and 0.3%, respectively.
Although Treasury futures suggest that there might be a reduction of 98 basis points in interest rates in 2024, compared to the 130 basis points forecasted a couple of weeks ago, inflation expectations have remained largely unchanged. This has caused “real” yields, which account for inflation expectations, to surge. This shift may prompt investors to reevaluate their risk-taking strategies.
Vishnu Varathan, Head of Economics at Mizuho Bank in Singapore, noted that this situation could have significant repercussions on credit and capital flows. He pointed out that the nearly 300 basis points added to 10-year U.S. real yields since September 2021 represents the sharpest tightening of real rates in the past 25 years. He also highlighted that a speech by Federal Reserve Chair Jerome Powell on Friday could drive real yields even higher.
The trend of surging yields was echoed in Australia, Korea, New Zealand, and Japan, where 10-year Japanese yields hit their highest since 2014 at 0.66%.
Low-Yielding Currencies and Commodity Markets
The Hang Seng index aimed to break a seven-day losing streak, rallying by 1.3% in the afternoon after a session marked by fluctuations between gains and small losses.
Shares in Australian mining giant BHP Group fell by 1.3% following its announcement of the weakest annual profit in three years. Nonetheless, the company expects Chinese demand to stabilize and growth momentum to regain traction later this year.
The rise in yields has put pressure on low-yielding currencies. The yuan stabilized around 7.2845 to the dollar after state banks intervened in the offshore forwards market.
The yen was also under scrutiny for potential intervention and experienced a slight boost from a meeting between Bank of Japan Chief Kazuo Ueda and the Prime Minister. It was last trading about 0.2% higher at 145.95 per dollar.
The euro remained firm at $1.0912, while Antipodean currencies rebounded from nine-month lows due to gains in Hong Kong stocks. The New Zealand dollar rose by 0.5% to $0.5957.
Oil prices have retreated from their August peaks, with Brent crude futures currently standing at $84.42. European gas prices have surged due to impending strikes at Australian liquefied natural gas facilities. Benchmark Dutch gas prices have risen by nearly 50% in August.
China’s Dalian iron ore price experienced a sharp increase of 4.1% to reach a two-year high.
While the data calendar for Tuesday is relatively light, investors are already positioning themselves for the release of positive news from chip designer Nvidia on Wednesday, as the company’s stock experienced a surge on Monday.