ASIA-PACIFIC RECAP
Risk assets continued to slide lower during the Asia-Pacific trade as an aggressive rise in global bond yields notably weighed on market sentiment. Australia’s ASX 200 plunged 2.35% as yields on local 10-year government bonds surged to the highest levels since April 2019, while Japan’s Nikkei 225 plummeted 3.6%. Hong Kong’s Hang Seng Index dropped over 3% and China’s CSI 300 fell 1.87%.
In FX markets, the haven-associated USD, JPY, and CHF largely outperformed, while the cyclically-sensitive AUD, NZD, and NOK slid lower. Gold and silver prices lost ground as yields on US 10-year Treasuries held above 1.47%. Looking ahead, US PCE figures for January and consumer sentiment for February headline the economic docket alongside trade balance data out of Mexico.
SURGING REAL YIELDS BUOYING US DOLLAR
Surging bond yields have buoyed the heavily under-fire US Dollar in recent days, and may open the door for the Greenback to claw back lost ground against the Euro in the near term. Yields on benchmark 10-year Treasuries surged to the highest level since early February of 2020, climbing over 14 basis points in 24 hours as investors continue to bet on the Federal Reserve adjusting its policy levers sooner-than-expected.
However, this seems relatively unlikely given the dovish rhetoric of several members of the Federal Reserve over the last few weeks. Atlanta Fed President Raphael Bostic – one of the first to suggest tapering measures at the end of 2021 – is not expecting to Federal Reserve to react prematurely to climbing yields, stating that they “have definitely moved at the longer end, but right now I am not worried about that”.
This reinforces the comments from Jerome Powell at the Fed’s semi-annual monetary policy testimony before Congress, with Powell reiterating that “the economy is a long way from our employment and inflation goals, and therefore the central bank will maintain its loose approach to monetary policy until “substantial further progress has been made” towards achieving its two mandated goals.
Nevertheless, breakeven inflation rates have stormed to multiyear highs, with the 10-year currently sitting at 2.1% and the 5-year at 2.35%. Real yields have also soared to 9-month highs, while expectations of the Federal Reserve’s first rate hike have been pulled forward from early-2024 to early-2023.
These dynamics could open the door for a short-term US Dollar recovery, with attention now intently focused on upcoming PCE figures for the month of January. A larger-than-expected increase in core PCE prices probably intensifying tapering bets and pushing the Greenback higher against its major counterparts.
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