Asian Markets Tumble Amidst Fed’s Hawkish Signals, Posing Challenges for Investors

Asian stocks and sovereign bonds faced a significant decline in response to hawkish signals from the Federal Reserve, sparking concerns about ongoing interest rate hikes in the U.S.

Hong Kong’s stock market notably underperformed, plummeting by as much as 3.4% upon reopening after a holiday, while other benchmark indexes across the region also dipped.

The MSCI Asia Pacific Index appeared headed for its lowest closing point since November, with China currently observing a week-long holiday.

In Australia, the central bank maintained its policy rate for the fourth consecutive meeting, but it cautioned that further monetary policy tightening might be necessary, causing the Australian dollar to retain its earlier losses and government bonds to remain relatively stable.

Simultaneously, bonds throughout Asia experienced a decline, with Australia’s 10-year bond yield remaining near its highest level since 2011.

These moves mirrored the slump in U.S. Treasuries following the Fed’s hawkish messaging, which overshadowed earlier optimism about avoiding a U.S. government shutdown.

Treasury yields across various maturities all surged approximately 10 basis points, while the benchmark 10-year note reached its highest level since 2007.

The market sentiment remained risk-averse, with a prevailing notion of “higher-for-longer” interest rates as U.S. economic data and central bank speakers maintained a slightly hawkish stance.

Asset allocators, including traditional 60/40 portfolio managers, were faced with challenging choices, but some saw bonds as an opportunity to lock in yields not seen in decades.

The global bond selloff gained momentum as traders increasingly bet on a November rate hike by the Fed, raising the likelihood from 25% to roughly one-in-three.

Federal Reserve Vice Chair for Supervision Michael Barr emphasized the key question of how long interest rates should remain elevated, while FOMC hawk Michelle Bowman reiterated her call for multiple rate hikes.

Cleveland Fed President Loretta Mester also expressed the likelihood of further rate hikes this year.

Despite these developments, the U.S. dollar strengthened against most major currencies, reaching a year-to-date high against the Japanese yen.

Meanwhile, gold stabilized after declining to its lowest point since March, and oil prices retreated, dropping below $90 a barrel, with waning demand from China expected to limit the impact of OPEC+ supply cuts.