Asian stock markets got off to a cautious start on Monday amid talk of further sanctions against Russia over its invasion of Ukraine, while bond markets continued to warn of downside risks for the US economy as short-term yields soar.
The holiday in China slowed trade, and MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.1%.
Japan’s Nikkei was flat, while S&P 500 futures were down 0.2% and Nasdaq futures were down 0.3%.
While Russian-Ukrainian peace talks have dragged on, reports of Russian atrocities have prompted Germany to say the West will agree to more sanctions in the coming days.
The German defense minister also said the European Union should discuss a ban on the import of Russian gas, a move likely to push prices higher while imposing some kind of energy rationing in Europe.
Data released last week showed that inflation in the European Union has already risen to a record high, adding to pressure on the European Central Bank to rein in runaway prices even as growth slows sharply.
“It appears that it is indeed time for the European Central Bank to take action,” ANZ analysts warned in a note. “While the European Central Bank will be cautious about raising interest rates, it certainly appears that it should act sooner to cancel its quantitative easing programme.”
The US Federal Reserve has already risen and is seen doing a lot after the strong March jobs report on Friday. Plenty of Fed officials are scheduled to speak at public events this week, with more hawkish noise expected, and the minutes of the latest policy meeting are due on Wednesday.
“We now expect the Fed to rise by 50 basis points in May, June and July, before reversing the pace a bit by raising 25 basis points in September, November and December,” said Kevin Kamins, chief US economist at NatWest Markets.
“This will bring the money rate into the restricted area soon, with 2.50-2.75% by the end of 2022.”
Investors have reacted by hitting short-term Treasuries and inverting the yield curve further as the market pricing the risk, all of this tightening will eventually lead to a recession.
On Monday, two-year bond yields rose at a three-year high of 2.49% and well above the 10-year mark at 2.410%.
The jump in yields helped support the US dollar, particularly against the yen as the Bank of Japan repeatedly acted last week to keep bond yields near zero.
The dollar was trading solidly at 122.63 yen, not far from a seven-year high of 125.10. The euro has drifted to $1.1041 and could fall further if the European Union actually moves to stem the flow of gas from Russia, which describes its move in Ukraine as a “special operation”.
The dollar index was last at 98.617, having recently bounced between 97.681 and 99.377.
Rising bond yields globally have been a drag on gold, which is not paying off, and the metal remained stuck at $1,923 an ounce. [GOL/]
Meanwhile, oil prices fell after the United Arab Emirates and the Iran-aligned Houthi movement welcomed a truce that would halt military operations on the Saudi-Yemeni border, alleviating some concerns about potential supply problems. [O/R]
Oil fell 13% last week – the biggest weekly drop in two years – after US President Joe Biden announced the largest release of US oil reserves ever.
Brent was last quoted a drop of 86 cents at $103.53, while US crude lost 80 cents to $98.47. [O/R]
(Editing by Kenneth Maxwell)
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