Asia stocks drop with bonds, Aussie holds loss: Markets wrap

Asian stocks declined along with sovereign bonds after hawkish signaling from the Federal Reserve stirred concerns the US central bank would continue to raise interest rates.

Hong Kong shares underperformed the region, falling as much as 3.4%, as trading resumed after a holiday. Other benchmark indexes also declined, driving the MSCI Asia Pacific Index to the lowest since December. China is in the midst of a weeklong holiday.

The Australian dollar held an earlier loss and the country’s government bonds were little changed after the central bank held its policy rate unchanged for a fourth meeting on Tuesday, while warning that some further tightening of monetary policy may be required.

Meanwhile, bonds in Asia fell, with the yield on Australia’s 10-year bond remaining near the highest since 2011. The moves mirrored the slump in Treasuries after hawkish Fed messaging overtook earlier optimism about the deal to avoid a US government shutdown. Yields on five- to 30-year Treasuries all jumped about 10 basis points Monday, while those on the benchmark 10-year note climbed to the highest since 2007. Treasuries steadied in Asia Tuesday.

“Markets remain in a risk-off with higher-for-longer still reverberating as US data and central bank speakers remain marginally hawkish,” said Charu Chanana, a market strategist at Saxo Capital Markets. “Asset allocators, including the 60/40 ones, could face a tough choice, but we think bonds present a once in several decades kind of an opportunity to lock in yields.”

The selloff in global bonds gathered momentum as the US shutdown reprieve prompted traders to raise bets on a November rate hike from the Fed to a roughly one-in-three chance, up from the 25% likelihood priced on Friday.

Fed Vice Chair for Supervision Michael Barr said the biggest question before central bankers was how long to leave rates elevated, while known FOMC hawk Michelle Bowman reiterated her call for multiple hikes. Cleveland Fed President Loretta Mester, who does not vote on monetary policy this year, said on Monday the central bank will likely need to raise rates once more this year and then hold them at higher levels for some time to get inflation back to its 2% target.

Japan auction

The dollar gained against most of its Group-of-10 peers after Bloomberg’s dollar index jumped 0.7% Monday. The greenback touched a year-to-date high versus the yen after the Bank of Japan said it would conduct an additional buying operation.

The yield on Japan’s 10-year bond slipped two basis points after the Ministry of Finance held an auction Tuesday.

New Zealand’s central bank on Wednesday is also expected to keep rates unchanged 10 days from a general election.

Meanwhile, China Evergrande Group defied the stock markets’ decline Tuesday, surging as much as 42% as it restarted trading after a halt last week.

Elsewhere, gold steadied after slipping to the lowest since March. Oil retreated, with West Texas Intermediate dropping below $90 a barrel. A Citigroup Inc. analyst said waning demand from China is poised to to cap the gains from OPEC+ supply cuts.

Key events this week:

China has week-long holiday
Atlanta Fed President Raphael Bostic speaks on economic outlook and inflation, Tuesday
US August JOLTS report, Tuesday
New Zealand rate decision, Wednesday
Eurozone services and composite PMIs, Wednesday
ECB President Christine Lagarde gives welcome address at conference, Wednesday
US ISM services index, Wednesday
France industrial production, Thursday
BOE Deputy Governor Ben Broadbent, Riksbank First Deputy Governor Anna Breman participate at panel discussion, Thursday
US trade, initial jobless claims, Thursday
San Francisco Fed President Mary Daly speaks at the Economic Club of New York, Thursday
Germany factory orders, Friday
US unemployment rate, nonfarm payrolls, Friday

Some of the main moves in markets:

Stocks

S&P 500 futures were little changed as of 1:05 p.m. Tokyo time. The S&P 500 was little changed
Nasdaq 100 futures were little changed. The Nasdaq 100 rose 0.8%
Japan’s Topix index fell 1.4%
Hong Kong’s Hang Seng Index fell 3%
Australia’s S&P/ASX 200 Index fell 1.2%