Asian stocks stall as US rates seen higher for longer Asian stocks braked around two-month highs on Thursday, while the dollar nursed modest losses, after the U.S. Federal Reserve chose not to hike interest rates for the first time in 17 months, even if it opened the door to more hikes ahead. The Fed left its benchmark funds rate window at 5-5.25%, and chair Jerome Powell said the U.S. central bank needed to gather more information about the economy to determine what to do next. Committee members surprised markets by projecting two more 25 basis point hikes this year, sending short-term U.S. yields higher and closing out bets on any cuts in 2023. The euro, made a one-month peak after the decision at $1.0865 and now, at $1.0826, awaits a European Central Bank meeting later in the day where markets expect an eighth straight rate hike will take borrowing costs to two-decade highs. “The market takeaway was that rates would stay high for longer, rather than spike upwards in line with the shift in projected Fed funds rate. “Two-year Treasury yields jumped as much as 13.5 bps in the session, before settling two bps higher at 4.69%. Ten-year yields fell 3 bps to 3.79%. Fed funds futures pricing didn’t budge all that much, but expectations for a hike next month firmed a little and traders pushed any hopes for cuts deeper into 2024. “The conditions we need to see … to get inflation down are coming into place,” Powell said. “But the process of that actually working on inflation is going to take some time.” CHINA SLOWDOWN In Asia the focus was on China where industrial output and retail sales figures fell short of market forecasts in the latest sign the economic recovery isn’t living up to hopes. China cut a key benchmark, its medium-term loan rates, by 10 bps and the yuan hit a six-month low of 7.1783 per dollar. “Expectations are building that additional stimulus will come from Beijing and this could be the much needed catalyst for the Chinese market to overcome a disappointing first half,” said Tai Hui, Asia-Pacific chief strategist at J.P. Morgan Asset Management. Elsewhere strong Australian jobs data leant some support to the Aussie dollar, which was broadly steady at $0.6786, while the New Zealand dollar was on the ropes after data showed the economy shrank into recession this year. That likely confirms an end to rate hikes and the kiwi was last down 0.7% at $0.6163. The euro, which has been grinding higher on the dollar for about two weeks on signs of slowing U.S. inflation and hints of cooling in the labour market faces its next test when the ECB meets later in the day. A 25 bp hike is expected. In Japan data showed exports unexpectedly rose in May, but the pace of growth was a crawl. The yen slipped about 0.5% to 140.74 per dollar, though moves were capped ahead of a Bank of Japan meeting on Friday. Oil dipped slightly with benchmark Brent crude futures down 0.16% to $73.08 a barrel. Gold, which pays no income, was pressured by expectations for U.S. interest rates to linger at high levels, and fell to a two-week low of $1,934 an ounce. Bitcoin dropped 3% overnight and nursed losses at $25,049.
However, he believes that the impact on the Indian market is going to be temporary since there could be some short-term impact on flows into Indian equity markets. But since the Indian economy is on a strong wicket and will continue to remain resilient.
“Improved fiscal situation, controlled current deficit, stable interest scenario combined with good corporate earnings should lead to limited impact on the Indian bond market and equity market too,” he added.
The midcap and smallcap indices took a bigger knock with the BSE MidCap fell 2.51%, while BSE SmallCap index dived 4.18%. According to Amnish Aggarwal, head, research, Prabhudas Lilladher, the valuations were already high and some correction was expected. “If the situation sustains as it is then further correction can’t be ruled out,” Aggarwal said.
Telecommunication and industrials indices were the top laggards with BSE Telecommunication declining 3.82%, followed by BSE Industrials falling 3.26%. JSW Steel (-2.99%), Tata Steel (-2.52%) and Tata Consultancy Services (-2.44%) were the top losers of Sensex.
Surprisingly, both foreign portfolio investors and domestic institutional investors were net buyers today. While, FPIs net bought shares worth Rs 252.25 crore, DIIs have purchased shares worth Rs 1,111.84 crore, as per provisional data from exchanges.
Calling this a “normal phenomena” Pankaj Pandey, head, research, ICICI Direct said, “I will not really give too much weight to a single day buying figure. Amid concerns of elevated interest rate and geopolitical tensions, in a typical market cycle, 8-10% correction is possible at any point in time.”
The brunt of geopolitical conflict, elevated interest rates and rising crude oil prices was also felt by other Asian- Pacific markets. Jakarta Composite Index lost 1.57% followed by Shanghai Composite Index and PSEi, which fell 1.47% and 0.89%, respectively. Nikkei and KOSPI declined 0.83% and 0.76%.