Markets across the Asia-Pacific region fell sharply on Wednesday, with South Korea's benchmark index leading the regional decline with a drop exceeding 6%, as chip stocks retreated from recent highs. Concurrently, with key U.S. inflation data imminent, expectations for Federal Reserve interest rate hikes have surged, putting pressure on risk assets. Gold prices fell below $4,200 per ounce.
South Korea's Kospi index tumbled 6.3%, making it the worst-performing major index in the region, with SK Hynix Inc shares plunging 9% to lead the chip sector lower. The MSCI Asia Pacific Index fell 2.5%, heading for its fourth decline in five trading sessions. Nasdaq 100 futures also dropped 0.8%, and European markets opened under pressure. Spot gold broke below the $4,200 per ounce level, down approximately 2%.
Geopolitical Tensions Escalate
Geopolitical tensions remain elevated, with U.S. forces striking 20 targets in Iran, and Iran retaliating against U.S. bases in Jordan and Bahrain. According to reports, U.S. Central Command stated it had completed "defensive strikes" against Iran in response to the downing of a U.S. helicopter on the 8th. Previously, the U.S. President stated on social media that Iran had shot down a U.S. Apache helicopter in the Strait of Hormuz, with both pilots safe, but that the U.S. must respond to the attack.
Bond Market Weakens Further
The bond market continued to weaken, with the yield on the 10-year U.S. Treasury note rising 2 basis points to 4.54%. In the Secured Overnight Financing Rate (SOFR) options market, which is closely tied to Fed policy, traders are increasingly betting on multiple Fed rate hikes in the coming months, with some expecting action as early as September.
Focus Shifts to U.S. Inflation Data
Market focus will shift to U.S. inflation data due Wednesday evening. According to a Bloomberg survey of economists, the annual CPI for May is expected to accelerate to 4.2% from the previous 3.8%, while core inflation is forecast to edge up slightly to 2.9% from 2.8%. This data is seen as a key signal for judging whether the new Fed Chair, Kevin Warsh, will maintain a hawkish stance.
Key Market Movements
South Korea's Kospi index fell 6.3%, becoming the worst-performing major index in the Asia-Pacific region, with SK Hynix Inc down 9% leading the chip sector lower.
Nasdaq 100 futures fell 0.8% in sync, and European markets opened under downward pressure.
The 10-year U.S. Treasury yield rose 2 basis points to 4.54%.
Japanese government bond futures extended losses following a 30-year bond auction.
Brent crude oil edged slightly higher, trading around $92 per barrel.
Spot gold broke below the $4,200 per ounce level, down about 2%.
Bitcoin fell over 1%, trading around $61,200.
South Korea's Market Leads Decline
The Kospi had previously surged strongly on the back of the artificial intelligence investment boom, ranking among the world's best-performing indices this year. However, as concerns over stretched valuations for tech stocks have accumulated, South Korea's tech sector, represented by chipmakers, has come under pressure first. SK Hynix Inc fell 9%, becoming a major weight dragging down the index.
BlackRock's Asia-Pacific head, Susan Chan, characterized the tech sell-off as an "opportunity," noting that markets have historically shown strong resilience. However, several market participants warned that adjustment pressure is unlikely to dissipate in the short term under the dual pressures of high valuations and rising rate hike expectations.
"Enthusiasm has built for months, pushing the market to new highs again and again," said John Cunnison, Chief Investment Officer at Baker Boyer Bank. "So any signal perceived as negative—whether it's rising inflation or rate hike expectations—will cause the market to lose its footing after this historic run."
Rate Hike Expectations Build
Since a much stronger-than-expected U.S. jobs report last Friday, bond traders have continued to increase bets on Fed rate hikes, with some positions pointing to a potential action window as early as September. Higher U.S. rates typically drain capital from emerging markets, boost the U.S. dollar, and increase borrowing costs, creating a tougher environment for risk assets.
"It seems a reasonable call at this stage that the FOMC will remove its easing bias next week, and the risk of the new Chair Warsh being hawkish is also not negligible," said Rodrigo Catril, a strategist at National Australia Bank in Sydney. "Overall, with the U.S. economy showing resilience and overall inflation rising, the pressure on the Fed to act will only grow if this situation persists."
Alex Loo, Senior Asia Economist at TD Securities in Singapore, also noted that if tonight's CPI data exceeds expectations, Warsh will find it difficult to maintain that rate cuts are still on the agenda, as recent public comments from several Fed officials have already leaned significantly hawkish.
In the coming week, several central banks will hold monetary policy meetings: the European Central Bank is set to announce its decision on Thursday, the Bank of Japan on June 16, and the Federal Reserve the following day.
Gold Under Pressure
Spot gold fell below $4,200 per ounce, down roughly 20% from its level before the Iran conflict escalated in late February. A recent break below the 200-day moving average—a widely watched long-term momentum indicator by institutional investors—further triggered technical stop-loss selling, amplifying the downward pressure.
Bloomberg strategist Garfield Reynolds pointed out that concerns that the U.S. inflation report could exceed expectations are keeping pressure on gold. After a strong jobs report pushed traders to start pricing in a December rate hike, robust inflation data could bring forward the expected timing of hikes even further.
Other Asset Movements
Bitcoin fell over 1%, trading around $61,200. Japanese government bond futures extended losses following a 30-year bond auction.
Indonesian markets showed signs of stabilizing: the rupiah recorded its largest single-day gain in over 13 months after officials stepped up efforts to provide assurances to foreign investors, bond market selling eased, and stocks rose for a second consecutive session.
Brent crude oil edged slightly higher amid heightened Middle East tensions following U.S. military strikes against Iran, trading around $92 per barrel after Tuesday's decline.
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