Asian shares followed global stocks lower after fears of faster monetary policy tightening by central banks delivered the worst day on Wall Street in almost five months.
Japan led the falls in Asian markets on Wednesday morning, with the Topix down 2.6 per cent, while Australia’s benchmark S&P/ASX 200 dropped 1.8 per cent and Hong Kong’s Hang Seng index and China’s CSI 300 both shed about 1 per cent in morning trading.
The sell-off for equity markets comes after policymakers at the US Federal Reserve and Bank of England indicated that interest rate hikes could come sooner than markets had expected due to persistently high inflation.
The prospect of quicker tightening has sent yields, which move inversely to bond prices, surging higher. The yield on 10-year US Treasury bonds has jumped 0.2 percentage points over the past week, spurring further selling of equities. The S&P 500 closed 2 per cent lower on Tuesday, its worst one-day fall since May, while the tech-focused Nasdaq Composite index dipped 2.8 per cent.
The Fed said last week it could reduce its $120bn-a-month of asset purchases and flagged that half of its board members expected an interest rate rise in 2022. That was followed by a warning from the Bank of England that UK inflation could top 4 per cent into next year.
“This doesn’t really feel like an optimal backdrop as we head into the fourth quarter,” said Robert Carnell, head of Asia-Pacific research at ING, pointing to rising Treasury yields, surging energy prices and concerns about contagion from indebted Chinese developer Evergrande, which rattled global markets last week.
The yen continued its slide against the US dollar on Wednesday, with the Japanese currency briefly touching its lowest level since March 2020 after falling about 2 per cent since last week.
The yen reached Y111.68 to the US dollar amid political uncertainty surrounding the selection of Japan’s new prime minister by members of the ruling Liberal Democratic party today.
Traders said it was difficult to see the currency breaking hard in either direction until the result was known, adding that the yen was acting as a double barometer of sentiment on rising US yields and commodity prices.
Higher US yields would attract fixed income investment flows from Japan, said Shusuke Yamada, chief Japan equities and FX strategist at Bank of America. Japan’s August trade deficit, meanwhile, was a signal of the country’s sensitivity to higher-priced imports.
Worries over inflation have been boosted by a spike in global commodity prices. Brent, the international benchmark, jumped above $80 a barrel on Tuesday for the first time since October 2018, as a surge in natural gas prices prompted countries to look elsewhere for their energy needs.
Oil prices were down in Asian trading on Wednesday with Brent off about 1 per cent at $78.19 a barrel.