To The Moon

Asian stock markets tumbled on Friday following sharp losses on Wall Street overnight, as comments from Federal Reserve Chair Jerome Powell dashed hopes for a dovish pivot on interest rates.

The Downfall of the Asia Rally

A weeks-long rally across Asian equities was abruptly halted after Powell stated the Fed was strongly committed to bringing inflation down and may need to raise rates higher than expected. His hawkish tone triggered a surge in Treasury yields and sent investors fleeing from risk assets.

The MSCI Asia Pacific index dropped 1.2% on Friday, poised to snap a three-week winning streak. Japan’s Nikkei 225 fell 0.8%, while Hong Kong’s Hang Seng index plunged 2.1%. Chinese blue chips lost 0.9% and Australia’s benchmark sank 1.2%.

“Powell stomped on the rally by saying there’s still a ways to go on rates and inflation remains too high,” said Clifford Bennett, chief economist at ACY Securities. “The market had presumed a Fed pivot was coming, but Powell’s clear message is tightening continues until inflation demonstrably drops to the 2% target.”

Tech stocks led the declines across the region as higher rates threaten their lofty valuations. Tencent and Alibaba each shed 3% in Hong Kong, while Samsung and SK Hynix dropped over 1% in South Korea.

SMIC, China’s largest chipmaker, tanked 10% after reporting earnings fell 56% last quarter amid COVID-19 disruptions and sluggish demand. Casino firm Wynn Macau plunged 14% as its net loss widened.

Yield Surge Snaps Treasuries Rally

The sharp selloff in Asia followed hefty losses on Wall Street, where the S&P 500 slid 0.8% to snap an eight-day winning streak. The tech-heavy Nasdaq shed 1.5%.

The mood soured after benchmark 10-year Treasury yields spiked back above 4.15%, undoing much of this week’s rally. Yields rose as high as 4.24% overnight, the largest single-day increase since early October.

The surge in yields came after a dismal auction of 30-year bonds led investors to dump longer-dated Treasuries. The weak demand rekindled concerns over how well markets can absorb swelling bond supply.

“With the auction coming after a 50 basis point rally in just one week, appetite was always going to be questionable,” said James Wilson, senior portfolio manager at Jamieson Coote Bonds.

The jump in yields reflects market expectations that the Fed still has a long way to go in tightening policy, despite hopes for a dovish pivot.

Powell Pours Cold Water on Pivot Hopes

In comments on Wednesday, Powell said the Fed has “ways to go” with interest rate hikes and needs to see consistent evidence that inflation is cooling before pausing its tightening campaign.

Markets were clearly not positioned for such a resolute message, having bet the Fed would switch to slower rate hikes as early as December.

“Powell’s remarks were more hawkish than traders anticipated,” said Matt Simpson, senior market analyst at City Index. “As yields pulled back over the past weeks, their sharp rise suggests the lows are in place for now.”

The remarks led traders to trim odds of a 50 basis point rate hike in December while pushing back expectations for rate cuts until the second half of 2023.

The US dollar also rebounded on Powell’s hawkish stance. The Bloomberg Dollar Spot Index jumped 0.9% on Thursday, its best single-day gain in five weeks. The Japanese yen, a popular funding currency, slipped back above 151 per dollar.

China Cash Crunch Fears Resurface

In China, short-term borrowing costs rose for banks as the central bank refrained from adding funds, stoking fears that a cash crunch may reemerge. Demand for the shortest-term funds surged the most since June.

Analysts say liquidity tensions could reappear later this year after unprecedented stimulus to fight COVID-19 outbreaks is withdrawn.

“Interbank rates should remain elevated until year-end,” said Becky Liu, head of China macro strategy at Standard Chartered Bank. “Any sharp drop of short-term rates in the near term could be short-lived.”

In data, China’s latest lending figures are expected Friday, while money supply data for October showed a slowdown in growth. Japan also reported money stock rose at a steady pace in October after accelerating the prior month.

Crypto Rebound Stalls as FTX Concerns Linger

In cryptocurrencies, Bitcoin struggled to extend its rebound as unease over the financial health of major exchange FTX kept gains in check. The largest token lingered around $17,500 after erasing earlier gains.

Bitcoin had rallied back near $21,000 earlier this week before allegations of mishandling customer funds at FTX halted its momentum. While FTX has denied accusations of mismanagement, the lingering doubts have sapped confidence in the battered crypto sector.

Ether also pared an advance to trade just above $1,200. The second biggest cryptocurrency had topped $1,300 for the first time in two weeks on Wednesday.

Key Events to Watch

Several Fed officials are set to speak on Friday, including New York Fed President John Williams, Atlanta Fed President Raphael Bostic and Fed Governor Lisa Cook. Investors will parse their remarks for clues on rate hike expectations.

Eurozone industrial production data for September will also be released on Friday, along with the University of Michigan’s preliminary November reading of US consumer sentiment.

Looking Ahead

Markets remain extremely sensitive to Fed rate hike expectations as investors search for clues on when the tightening cycle may finally peak. Powell’s latest comments suggest officials remain squarely focused on bringing inflation back to target before pausing.

The Fed chief may provide additional guidance on the policy outlook when he speaks again next week. For now, traders have little choice but to brace for more volatility as the tug of war continues between central bank hawks and bond market doves.

Conclusion

Jerome Powell’s resolute message on interest rates rattled Asian markets on Friday, halting a rally across regional equities and sending yields sharply higher. The Fed chief’s remarks dashed hopes for a dovish policy pivot and suggested tightening will continue until inflation is convincingly tamed. While markets have been betting on an earlier pause in hikes, Powell left no doubt that the fight against inflation remains the top priority. Until clear evidence emerges of cooling price pressures, investors may need to accept higher rates and market turbulence for longer than anticipated.