MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.1% in Monday’s trading on a cautious start.
Asian stock markets got off to a cautious start on Monday amid talk of more sanctions on Russia over its invasion of Ukraine, while bond markets continued to suggest a risk of a hard landing. to the US economy as short-term yields rise sharply.
The Chinese holiday season slowed trading, and the MSCI index of Asia-Pacific shares, the broadest outside of Japan, fell 0.1%.
Japan’s Nikkei 225 index was flat, while S&P 500 futures fell 0.2 percent and Nasdaq fell 0.3 percent.
As Russia-Ukraine peace talks continue to drag on, reports of Russian atrocities have prompted Germany to say the West will agree to impose more sanctions in the coming days.
The German defense minister also said the European Union must discuss banning Russian gas imports, a step that would likely drive prices higher while forcing the allocation of some energy in Europe.
Last week’s data showed inflation in the EU rose to a record high, putting pressure on the European Central Bank to rein in fleeing prices even as growth slows.
“Looks like it is time for the ECB to act,” warned analysts at ANZ in a note. “While the ECB will be cautious about rate hikes, it looks like it should have acted sooner to abolish its QE program.”
The US Federal Reserve rose and is tipped to do more after its solid March payrolls report on Friday. There are plenty of Fed officials to speak at public events this week, with the prospect of more hawkish buzz, and the minutes of the final policy meeting on Wednesday.
“We now expect the Fed to raise it by another 50 percentage points in May, June and July, before turning around to speed it up a bit by 25 percentage points… [in] September, November and December,” said Kevin Cummins, chief US economist at NatWest Markets.
“This will bring fund rates into restricted territory sooner, with 2.50-2.75 percent by the end of 2022.”
Yield Curve Inverted
Investors have responded by hitting short-term Treasuries and continuing to invert the yield curve as the market priced in the risk that all this tightening will eventually lead to a recession.
On Monday, the two-year yield rose to a three-year high of 2.49% and well above the 10-year yield of 2.41%.
The rise in yields underpinned the US dollar, especially against the yen as the Bank of Japan acted consistently last week to keep its bond yields close to zero.
The dollar was traded by the company at 122.63 yen and not far from its recent seven-year high of 125.10. The euro slipped to $1.1041 and could fall further if the EU acts to stem the flow of gas from Russia, which calls its actions in Ukraine a “special operation”.
Rising global bond yields have been a drag on gold, as the metal was stuck at $1,923 an ounce.
Meanwhile, oil prices fell after the United Arab Emirates and Iran-aligned Houthi group welcomed a truce to halt military operations on the Saudi-Yemen border, reducing alleviate some concerns about potential supply problems.
Oil fell 13% last week – the biggest weekly drop in two years – after US President Joe Biden announced the largest ever US oil inventories.
Brent was last quoted 86 cents lower at $103.53, while US crude lost 80 cents to $98.47.