Asian stocks drop amid higher bond yields, firm dollar; treasuries remain lower, oil past $91 per barrel

Stocks retreated in Asia on Tuesday after worries about Federal Reserve monetary tightening saddled US shares with their worst drop in two months while boosting bond yields and the dollar. Bourses in Japan, Australia and South Korea were in the red, while S&P 500 and Nasdaq 100 futures stabilized, eking out modest gains, after slumps of more than 2% in both indexes on Monday. Contracts for Hong Kong were steady earlier. China has cut borrowing costs and plans special loans for developers worth as much as 200 billion yuan ($29.3 billion). These moves to tackle a property crisis may be a prop for sentiment on the mainland and in Hong Kong.

The Fed’s brake on the US economy to ensure high inflation keeps cooling remains the key wider driver in global markets. Traders are bracing for hawkish talk at the central bank’s Jackson Hole symposium later this week. Treasuries remained lower after a selloff Monday against that backdrop, with the 10-year yield now above 3%. Australian and New Zealand bonds fell. The dollar was firm and the euro near a two-decade low. Doubts are creeping in about bets that the Fed will temper monetary-policy tightening, expectations that had helped to lift investor sentiment.

For instance, hedge funds in a key part of the derivatives market have made record wagers that the US central bank will stick to a hawkish script. The Fed’s “incentives are to communicate that rate hikes will remain the norm for the balance of the year” even if eventually the pace will slow, Benjamin Jeffery and Ian Lyngen, strategists at BMO Capital Markets, wrote in a note. Hedge funds collectively placed a big short across futures referencing the official successor to the London interbank offered rate known as the Secured Overnight Financing Rate. This position stands to benefit should Fed Chair Jerome Powell effectively rule out a dovish pivot at Jackson Hole.

Tightrope

Powell and his colleagues at the Fed are walking a tightrope, trying to contain price pressures while averting a US recession. At the same time, growth risks are evident across the world, spanning Europe’s energy crisis to China’s property and Covid troubles. With total debt in the US at more than $30 trillion, a 1% increase in rates leads to a “huge” climb of more than $300 billion in interest payments, Tracy Chen, portfolio manager at Brandywine Global Investment Management, said on Bloomberg Television. “How high can the Fed technically hike their interest rate? Is a 4%-5% fed funds rate realistic?” she said, underlying the sobering challenge that lies ahead.

Elsewhere, oil pushed past $91 a barrel after Saudi Oil Minister Prince Abdulaziz bin Salman warned the disconnect between the futures market and fundamentals may force OPEC and its allies to act. Bitcoin found its footing but is about $2,000 off levels that prevailed before a crypto swoon on Aug. 19.

What to watch this week

US new home sales, S&P Global PMIs, TuesdayMinneapolis Fed President Neel Kashkari speaks at a Q&A session, TuesdayUS durable goods, MBA mortgage applications, pending home sales, WednesdayUS GDP, initial jobless claims, ThursdayKansas City Fed hosts its annual economic policy symposium in Jackson Hole, Wyoming, ThursdayECB’s July minutes, ThursdayFed Chair Powell speaks at Jackson Hole, FridayUS personal income, PCE deflator, University of Michigan consumer sentiment, Friday

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Some of the main moves in markets:

StocksS&P 500 futures rose 0.3% as of 9:20 a.m. in Tokyo. The S&P 500 fell 2.1%Nasdaq 100 futures added 0.3%. The Nasdaq 100 fell 2.7%Japan’s Topix index fell 0.8%Australia’s S&P/ASX 200 index weakened 0.5%South Korea’s Kospi index dropped 0.4%Hang Seng index futures were little changed earlier

CurrenciesThe Bloomberg Dollar Spot Index was steadyThe euro was at $0.9937The Japanese yen was at 137.65 per dollar, down 0.1%The offshore yuan was at 6.8715 per dollar, down 0.1%

BondsThe yield on 10-year Treasuries was at 3.02%Australia’s 10-year yield added seven basis points to hit 3.59%

CommoditiesWest Texas Intermediate crude was at $91.05 a barrel, up 0.8%Gold was at $1,736.12 an ounce