Asian stocks fall, a major test for UK bonds looms

  • The Nikkei fell 1.4%, the S&P 500 rose after pulling back
  • Focus on gold bonds as Bank of England buyout ends, Truss’ future in doubt
  • The dollar is near 149 yen, and the market is wary of intervention

SYDNEY (Reuters) – Asian stock markets fell on Monday after another rout on Wall Street as investors braced for a further severe tightening of global financial conditions, with all the risks of a recession that it brings.

Concerns about financial stability have added to the devastating mix with all eyes focused on British bonds, after the Bank of England (BoE) emergency buying spree ended.

Prime Minister Liz Truss’ decision to fire her finance minister may help reassure investors, but her fate is unclear as media reports Tory MPs will try to replace her this week.

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Bank of England Governor Andrew Bailey warned over the weekend that interest rates may now have to rise by more than they thought just two months ago.

“The Bank of England has been buying technically similar emergency bonds to quantitative easing with one hand, while aggressively raising the policy rate with the other,” ANZ analysts said in a note.

“Monday’s market action will provide a test not only of Truss’ continued vision for lower taxes, but also of her political future.”

Sterling rose 0.4% to $1.1219, but from early highs with sparse trading in Asia. FTSE futures are down 0.5%, EUROSTOXX 50 futures are down 0.6%.

MSCI’s broadest index of Asia Pacific shares outside Japan (MIAPJ0000PUS.) It fell 1.2% and returned back towards last week’s 2-1/2 low.

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Japan’s Nikkei Index (.N225) Falling 1.4% and South Korea (.KS11) 0.1%. Chinese blue chips (.CSI300) It fell 0.4% ahead of the GDP data due on Tuesday.

S&P 500 futures rose 0.4% after Friday’s sharp decline, while Nasdaq futures rose 0.3%.

While the S&P is losing sight of 25% from its peak, Bank of America economist Jared Woodard warns that the slide is not over as the world has been transitioning from two decades of 2% inflation to a time similar to 5% inflation.

“$70 trillion in ‘new’ technology, growth, and government assets priced at 2% world is as vulnerable to such secular transformations as ‘old’ industries like energy and materials, reflecting decades of underinvestment,” he wrote in a note.

“Rotating 60/40 agents and buying what is scarce — energy, food, energy — is the best way for investors to diversify.”

intervention hour

A fiery US consumer price report and rising inflation expectations have markets fully expecting the Federal Reserve to raise interest rates by 75 basis points next month, and that rate will likely rise again in December.

A large number of Fed policymakers are speaking this week, so there will be plenty of opportunity for hawkish news headlines. Earning season continues with Tesla Inc (TSLA.O)Netflix (NFLX.O) johnson & johnson (JNJ.N) Reports, among others.

Goldman Sachs Group Inc. (GS.N) The Wall Street Journal also reported this week that the investment bank plans to restructure its largest business into three divisions.

In China, the Communist Party Congress is expected to give Chinese President Xi Jinping a third term, while there may be a reshuffle in top economic roles as office holders approach retirement age or term limits.

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In the currency markets, the dollar is still king as investors’ price in the US has peaked around 5%.

The yen took a particularly hard hit as the Bank of Japan stuck to its ultra-easy policy, while the authorities held back from intervening last week even as the dollar scrambled past the 148.00 level to 32-year highs.

Early on Monday, the dollar rose to 148.73 yen and is heading towards the next target at 150.00.

The euro settled at $0.9733, after achieving a more stable performance last week, while the US dollar index slipped slightly to 113.20.

Rising dollar and global bond yields were a drag on gold, which remained stuck at $1,648 an ounce.

Oil prices have been trying to rebound, having fallen more than 6% last week as worries about slowing demand overshadowed OPEC’s plans to cut production.

Brent settled 64 cents at $92.27 a barrel, while US crude rose 55 cents to $86.16 a barrel.

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Reporting from Wayne Cole. Editing by Himani Sarkar, Anna Nicholas Da Costa and Muralikumar Anantharaman

Our criteria: Thomson Reuters Trust Principles.

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