Asian stocks are feeling interest rate pressures, and the dollar is surging

  • Nikkei fell, and S&P futures rose an inch
  • Higher Fed rate peak, which supports the dollar
  • US ISM surveys, focus on China PMIs

SYDNEY (Reuters) – Asian stocks hit two-month lows on Monday as markets were forced to price in persistently high U.S. and European interest rates, dragging bonds globally and propping up the dollar near multi-week highs.

Investors are bracing for more challenging US data including closely watched ISM metrics for manufacturing and services, the latter especially important after the stunning spike in activity in January.

There are also at least half a dozen Fed policy makers on this week’s speaker diaries to provide ongoing commentary on the prospect of another rate hike.

China is conducting surveys on manufacturing and the National People’s Congress opens this weekend and will see new economic targets and policies, as well as a redeployment of government officials.

MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 1.0%, after falling 2.6% last week. Japan’s Nikkei (.N225) fell 0.2% and South Korea’s (.KS11) fell 1.2%.

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China blue chips (.CSI300) fell 0.2%, while China Renaissance Holdings (1911.HK) rebounded after the mainland boutique bank said its missing boss was cooperating with Chinese authorities in an investigation.

EUROSTOXX 50 futures added 0.1% and FTSE futures added 0.4%.

S&P 500 futures rose 0.1%, while Nasdaq futures rose 0.2%. Strong data on spending and core prices saw the S&P 500 bolster at 4,000 on Friday and offset 61.2% of this year’s rise.

Fed futures prices are now peaking around 5.42%, which implies at least three more hikes from the current 4.50% to 4.75% range, and some chances of 50 basis points in March.

Markets also raised potential interest rate highs for a host of other central banks, including the European Central Bank and the Bank of England. And

It’s a stretch

Bruce Kasman, head of economic research at JPMorgan, added another quarter-point hike to the ECB’s forecast, bringing it up to 100 basis points. The two-year German bund yield topped 3.0% on Friday for the first time since 2008.

“It’s clear that the risk is skewed towards greater Fed action,” Kasman says.

He added, “Demand proves its resilience in the face of the continuing and severe damage to supplies from the epidemic, which limits the moderation of inflation.” “The transmission of the rapid policy shift that is still under way also raises the risk of a recession that central banks do not intend.”

The Atlanta Federal Reserve’s GDP tracker now reports that the US economy grew at an annualized rate of 2.7% in the first quarter, showing no slowing from the December quarter.

Rates and returns increase extended valuations of stocks, especially those with high earnings ratios and low dividend payments, which include a large portion of the technology sector.

US stocks trade at an earnings multiple of about 17.5 times forward earnings, compared to 12 times for non-US stocks.

Ten-year Treasury notes also yield more than twice the dividend yield estimated by the S&P 500, with much lower risk.

With earnings season almost over, about 69% of earnings have surprised to the upside, compared to the historical average of 76%, and annual earnings growth is around -2%.

The upward shift in the Fed’s outlook has been a boon for the US dollar, which rose 1.3% on a basket of currencies last week to last stand at 105,220.

The euro was steady at $1.0546, after touching a seven-week low of $1.0536 on Friday.

The dollar climbed to a nine-week high on the yen, last standing at 136.27, supported in part by dovish comments from senior policymakers at the Bank of Japan.

The rising dollar and yields weighed on gold, which lost 1.7% last week and was last at $1,810 an ounce.

Oil prices fell as the prospect of lower Russian exports was offset by rising inventories in the US and concerns about global economic activity.

Brent crude fell 33 cents to $82.83 a barrel, while US crude fell 25 cents to $76.07 a barrel.

Reporting from Wayne Cole. Editing by Shri Navaratnam and Sam Holmes

Our standards: Thomson Reuters Trust Principles.

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