Asian markets mostly rose Tuesday, fuelled by growing hope that vaccine rollouts will allow the global economy to get back on track, but the optimism was tempered by niggling worries that the recovery will fan inflation and interest rate hikes.
With governments picking up the pace in their coronavirus inoculation drives, and infection and death rates slowing in most parts of the world, observers are predicting a surge in economic activity from the middle of the year as lockdowns are eased.
Added to that is Joe US President Biden’s huge growth-boosting spending programme, which is likely to be passed by Congress next month, on top of the Federal Reserve’s pledge to keep monetary policy ultra-loose for as long as needed.
Monumental government and central bank support worth trillions of dollars has been a key driver of the surge in world equities from their nadir almost a year ago when the coronavirus was rampaging across the planet.
But while the mood is increasingly good, investors are turning their focus to the impact of the reflation — a rally in prices as people go back to shops and restaurants or start going on holiday again.
Expectations that inflation will spike has seen US 10-year Treasury yields rally to a one-year high, and that has spooked investors who fear that means interest rates will go up in turn.
Technology firms, which have outperformed as they benefit from people being forced to stay home, have been worst hit, while those likely to do well as economies reopen are enjoying much-needed buying interest.
“Investors are quickly rediscovering that not all stocks are created equal in a Covid recovery as expensive tech names (are sold) to provide the source of funds for less expensive travel-related markers, along with energy and other inflation beneficiaries,” said Axi strategist Stephen Innes.
The play-off between recovery and inflation worries has brought a rally in world markets to a halt in recent weeks, after some had hit record or multi-year highs.
– ‘Blase’ Fed concern –
The tech-rich Nasdaq tumbled more than two percent Monday, while the S&P 500 was also in the red, though the Dow eked out gains.
And Asian investors trod warily. Hong Kong, Sydney, Singapore, Taipei, Manila, Mumbai, Bangkok and Jakarta were all up but Shanghai, Seoul and Wellington fell. Tokyo was closed for a holiday.
Crucial catalysts to drive stocks higher “may be fading as markets come to terms with the next phase of the recovery”, said Chris Iggo at AXA Investment Managers.
“I wouldn’t be surprised if market returns are more volatile in the coming months.”
Traders are keenly awaiting Fed boss Jerome Powell’s congressional testimony from Tuesday, looking for an idea about the central bank’s thinking on the rising yields and their effect on policy, particularly interest rates.
“The Fed has gone to great lengths to dial back expectations of any possible near term rate rise, giving the impression that they will ignore any short-term inflationary spikes,” said CMC Markets’ Michael Hewson.
“With US 10-year yields falling just shy of 1.4 percent… there is a concern that US central bankers are being a little bit too blase about inflation risks”, particularly with a new US stimulus close.
But OANDA’s Edward Moya said Powell will likely reaffirm his commitment to seeing employment recover and inflation remain elevated.
“The path of rates won’t change this year, with the earliest that some economists see a potential move up in rates being next January,” he said.
“Since financial conditions are tightening and with wage pressures remaining nonexistent, that should keep inflation fears from getting out of control.
“The economic data has been improving but remains inconsistent and that is all Powell needs to keep his ultra-accommodative stance.”
Oil prices continued their march higher, piling on more than one percent a day after clocking up gains of almost four percent, on demand optimism as the world emerges from lockdown.
– Key figures around 0710 GMT –
Hong Kong – Hang Seng: UP 1.2 percent at 30,670.60
Shanghai – Composite: DOWN 0.2 percent at 3,636.36 (close)
Tokyo – Nikkei 225: Closed for a holiday
Pound/dollar: DOWN at $1.4060 from $1.4064 at 2145 GMT
Euro/dollar: UP at $1.2167 from $1.2161
Euro/pound: UP at 86.53 pence from 86.44 pence
Dollar/yen: UP at 105.09 yen from 105.07 yen
West Texas Intermediate: UP 1.4 percent at $62.55 per barrel
Brent North Sea crude: UP 1.6 percent at $66.31 per barrel
New York – Dow: UP 0.1 percent at 31,521.69 (close)
London – FTSE 100: DOWN 0.2 percent at 6,612.24 (close)
— Bloomberg News contributed to this story —
