Asian markets dropped on Wednesday, tracking losses in the United States and Europe as traders responded negatively to higher-than-expected US inflation data that raised fears of a prolonged period of interest rate hikes.
Tokyo, Hong Kong, Shanghai, Seoul, Taipei and Sydney were all lower, reversing gains made in recent days due to positive market expectations from the US labour department’s consumer price index (CPI) report.
On Tuesday, US government data showed the annual increase in CPI had slowed slightly in August to 8.3 percent, but that prices continued to rise month-on-month, increasing by 0.1 percent.
The news shook equity markets, where there had been widespread expectations of US year-on-year inflation being around eight percent, with a decrease in prices compared with July.
Tokyo led the day’s losses in Asia, with the Nikkei 225 plunging 2.8 percent.
In Hong Kong, stocks closed down more than two percent, with Chinese conglomerate Fosun seeing billions wiped off its value as jittery investors reacted to media reports that the group was under regulator scrutiny.
Major European bourses followed the trend, with London, Frankfurt and Paris opening lower.Â
‘Scorching hot’ inflation –
The United States and other economies have been battling sky-high price increases for months, with US yearly inflation hitting a 40-year high of 9.1 percent in June.
Wall Street shares plunged following the CPI news, with the Dow losing nearly 1,300 points and the S&P 500 falling 4.3 percent on Tuesday.
The data will have dashed hopes of a slowdown in the US Federal Reserve’s campaign of increasing interest rates to cool the overheating economy.
The Fed has already instituted two consecutive 75-basis-point hikes, and there are widespread expectations it will make a similarly sized increase at its meeting next week.
After Tuesday’s data, however, some investors are now predicting the next Fed hike could be by a full percentage point.
Of concern to the Fed will be the fact that “core” US CPI, which excludes volatile food and energy prices, accelerated sharply, rising 6.3 percent on a year ago, higher than the 5.9 percent seen in July and June.
Despite welcome relief from falling gasoline prices, food, housing and medical care costs continued to rise.
“Core inflation was scorching hot, coming in double expectations,” said senior market analyst Edward Moya at OANDA.
“The Fed will likely have to be even more aggressive with raising rates and that is bad news for risky assets.”
Investor Louis Navellier warned that persistently high interest rates to control inflation could lead to a US recession.
“Stocks are taking it very hard as forecasts are rising for Fed Funds to get higher and stay there longer resulting in a discount of future earnings multiples and increasing recession fears,” he said in a note.
In Britain, new data Wednesday showed inflation eased in August, but it remains close to the previous month’s 40-year peak as the country battles a cost-of-living crisis.
Yen stabilises –
The dollar, which had earlier this week fallen against its major rivals in anticipation of slowing inflation, surged in Asian trade.
The yen plunged to 144.94 against the US currency, before recovering sharply following reports that the Japanese central bank had conducted a “rate check”, an exercise often seen as a precursor to currency intervention.
The yen returned to 143.53 to the dollar within an hour of those reports.
The euro also lost ground on Wednesday, dropping back below parity with the US currency once again.
The dollar’s rise is partly because the Fed has moved more aggressively with interest rate hikes than central banks in other major economies.
The European Central Bank raised its key rate by 75 basis points this month, with officials indicating a similarly sized increase could come at the next meeting in October.
Inflation has soared around the globe this year owing to extremely high energy and food bills.
This has been caused to a large extent by supply constraints after economies reopened from coronavirus pandemic lockdowns, and in the wake of Russia’s invasion of Ukraine.
Key figures at around 0730 GMT –
Tokyo – Nikkei 225: DOWN 2.8 percent at 28,818.62 (close)Â
Hong Kong – Hang Seng Index: DOWN 2.5 percent at 18,847.10 (close)
Shanghai – Composite: DOWN 0.8 percent at 3,237.54 (close)
New York – Dow: DOWN 3.9 percent at 31,104.97 (close)
London – FTSE 100: DOWN 0.9 percent at 7,321.47
Frankfurt – DAX: DOWN 0.3 percent at 13,148.25
Paris – CAC 40: DOWN 0.3 percent at 6,229.08
EURO STOXX 50: DOWN 0.25 percent at 3,577.35
Euro/dollar: UP at $1.000 from $0.9974
Pound/dollar: UP at $1.1547 from $1.1500
Euro/pound: DOWN at 86.61 pence from 86.74 pence
Dollar/yen: DOWN at 143.07 yen from 144.43 yen
Brent North Sea crude: DOWN 0.02 percent at $93.15 per barrel
West Texas Intermediate: UP 0.1 percent at $87.42 per barrel
