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Inflation Thunderbolt Primes Stocks, Bonds More Volatile

(Bloomberg) – Stocks and bonds face more pain as markets open in Asia on Monday after the US inflation shock pressured the Federal Reserve to step up money tightening. bad.

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Stock futures showed declines in Japan and Hong Kong following last week’s worst drop in global equities since October 2020. Asian sovereign bonds will slide in line The slide of the Treasury slump pushed two-year US yields to a 14-year high.

The change in short-term rates puts the yield on the 30-year Treasury note below the yield on the five-year bond, leading to the risk of an aggressive Fed rate hike leading to a tough economic landing. The dollar hit a one-month high as investors sought shelter amid a toxic mix of rising costs and slowing growth.

“At some point, financial conditions will tighten enough and/or growth will weaken to the point where the Fed may pause rate hikes,” said Goldman Sachs Group Inc strategists. including Zach Pandl wrote in a note. “But we still appear to be far from that point, which suggests upside risks to bond yields, continued pressure on risk assets and likely US dollar strength. big at the moment.”

The US consumer price index rose 8.6% in May from a year earlier in a broad advance to a 40-year high, adding to a flurry of worrisome inflation data across the country. many country. Many investors expect three half-point rate hikes by the Fed this week and again in July and September. Barclays Plc and Jefferies LLC say an even larger 75 basis point move is possible. happened at the June meeting.

Sonal Desai, Franklin Templeton’s chief investment officer of fixed income, said on Bloomberg Television “it can’t be anything that any central bank can move. “We will see many of the same things. It won’t be a nice smooth grinding process or more. The Fed will need to do more.”

Chinese, Yen

Markets will also face a Covid outbreak in China, where Beijing and Shanghai continue to test for the virus. The worry is that China’s Covid-zero strategy will lead to multiple shutdowns, damaging both the country’s economy and global supply chains. The latter are also affected by the war in Ukraine.

Asian currencies could also come under pressure after the dollar spike. The yen remains at a 24-year low against the greenback as the stark policy contrast between the belligerent Fed and the still dovish Bank of Japan.

But senior Japanese officials issued a sharp bullish warning on Friday for the yen, seeking to keep a floor for the currency. According to Pandl and the Goldman team, such communications indicate high near-term uncertainty about the yen and an “increasing risk of a change in Japanese policy.”

Emerging markets are under particular pressure from rising food prices, with the risk that this could weaken their economies and cause social unrest, according to strategists at the Bank. Standard Chartered products.

The S&P 500 index fell 2.9% on Friday, a three-week high, while the tech-heavy Nasdaq 100 fell 3.6%. For the week, the MSCI AC World index lost 4.4%. The bad sentiment was evident over the weekend during a crypto slide that sent Bitcoin to as low as $27,265, its lowest level since mid-May.

Oil posted a seventh week of gains as a tight fuel supply balance maintained bullish fundamentals, although headwinds brought on by accelerating US inflation capped crude gains.

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