Asia stocks fell for a second straight day on Friday and were headed for their worst week in two months after a slew of central banks raised interest rates and warned there were more hikes to come next year.
Interest rates went up in Europe, Britain, Switzerland, Denmark, Norway, Mexico and Taiwan on Thursday, following a U.S. rate hike on Wednesday, and central bankers’ vows to keep on raising rates until inflation is tamed had markets worried about a potential recession.
Japan’s Nikkei (.N225) fell 1.9%.
Overnight on Wall Street the S&P 500 (.SPX) had its biggest percentage drop in more than a month as it fell 2.5%. S&P 500 futures were flat and European futures up 0.3%.
Treasuries were steady while the dollar hung on to what were on Thursday its best gains in about two months.
“Central banks are still hawkish, still intent on raising rates,” said Alvin Tan, Asia currency strategist at RBC Capital Markets in Singapore, while markets still price in U.S. rate cuts in the second half of next year.
“So there’s a tension … and that dichotomy has been emphasised over the past 48 hours by both the Fed and the European Central Bank.”
On Thursday the European Central Bank made a 50 basis point hike like the Fed, with both opting for a smaller increase than previously, but it flagged there were more hikes to come than investors had expected.
ECB President Christine Lagarde said current information predicates “another 50 basis point rise at our next meeting and possibly at the one after that, and possibly thereafter,” prompting traders to jack up Europe’s rate expectations.
“This is not a pivot,” she said of the smaller rate rise. “We are not slowing down, we are in for the long game.”
The Bank of England announced a 50 bp hike, too, and forecast more. Even Norges Bank, which began hiking in September last year and has raised rates by 275 basis points since then, hiked 25 bps on Thursday and said it isn’t finished.
In China, where markets are churning around an uncertain reopening, relief at the apparent resolution of a long-running accounting access dispute with the United States was not enough to drive a rally, and the Hang Seng (.HSI) was flat.
The prospect of higher near-term rates also has investors nervous about longer-run growth as there are growing signs that a worldwide slowdown is gathering steam.
Japan’s manufacturing activity shrank at the fastest pace in more than two years in December, a corporate survey showed on Friday. U.S. retail sales fell more than expected in November as some of the consumption momentum ebbs away from the economy.
Ten-year Treasuries rallied a bit on Thursday before steadying in Asia at 2.4736% during Friday. Larger moves were in currencies, where the dollar arrested its recent slide with its sharpest jump in two months.
The dollar index rose 0.9% on Thursday. It gave back 0.1% on Friday to sit at 104.37. The dollar jumped 1.7% and through its 200-day moving average on the yen, where it was a bit softer at 137.29 yen . The Aussie dollar had it worst session in two years and dropped 2.4% on Thursday.
“This time it wasn’t U.S. bond yields driving the move, instead it was just a feeling that if Fed policy remains tighter for longer … it could be tough going for risk assets,” strategists at ANZ bank said in a market note.
“The Fed may not be hiking as fast, but it still has the highest policy rate in the G10 and will be one of the few central banks to take policy (rates) past 5%.”
Gold fell against the rising dollar, dropping 1.7% to sit at $1,777 an ounce in Asia. Oil gave back some recent gains with Brent crude futures down 1.8% overnight and steady on Friday at $80.94 a barrel.