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Asian markets see rare rally but caution rules as Fed hike nears

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Expectations for more Federal Reserve rate hikes are keeping the dollar at multi-decade highs against major peers including the yen and sterling./AFP
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Sep 20, 2022 - 10:51 AM

HONG KONG, CHINA — Asian markets enjoyed a much-needed bounce Tuesday, tracking Wall Street’s late rally as investors gird themselves for another big Federal Reserve interest rate hike this week, though fears of a recession remain elevated.

Global equities have taken a severe body blow in recent weeks as central banks struggle to rein in stubbornly high inflation, Russia continues its war in Ukraine and China’s economic woes darken the mood across trading floors.

With the main concern being that sharp increases in borrowing costs will cause recessions in major economies, this week will be a minefield for traders with several countries, including Britain, tipped to announce more tightening.

The Fed’s decision, however, is the main focus after figures last week showed prices are still rising at rates not seen since the early 1980s.

Most observers expect the bank to announce a third successive 75-basis-point lift, though there are some who have flagged a possible one-percentage-point move.

And there is speculation that the rises will not stop until the rate is above four percent, still some way from the current 2.25-2.75 percent.

“We expect central bank tightening and a fading of supply chain pressures to moderate job growth and core inflation,” JPMorgan Chase & Co said, tipping it to end at 4.25 percent by early next year.

“In turn, we anticipate this will allow the Fed and other central banks to pause” in the first half of 2023, said strategists including Marko Kolanovic and Nikolaos Panigirtzoglou.

In a sign of expectations that rates will continue up for some time, the two-year Treasury yield is on course to break four percent for the first time since 2007.

It is also much higher than the 10-year yield, which is called an inversion and considered a key pointer to recession.

‘Pessimism remains elevated’ 

The outlook remains downbeat, with Edward Moya at OANDA warning the lows of June could be seen again.

“Pessimism for equities remains elevated as the US economy appears to have a one-way ticket towards a recession as the Fed is poised to remain aggressive,” he said in a note.

“The risks for a retest of the summer lows could easily happen if the Fed remains fully committed (to) their inflation fight.”

And CMC Markets analyst Michael Hewson added that “the main factor spooking markets right now is how much higher will rates have to go, and will there be any more profit warnings” from firms such as that from US shipping giant FedEx last week.

Still, Asian markets were on the up Tuesday.

Hong Kong rose more than one percent with tourism-linked firms boosted by news that the city’s government was considering bringing an end to the hotel quarantine rules that have helped hammer the local economy.

Sydney and Mumbai were also up more than one percent, while Tokyo returned from a long weekend to post healthy gains. Shanghai, Seoul, Singapore, Taipei, Manila, Wellington, Bangkok and Jakarta were also higher.

London enjoyed early gains after a special public holiday for the queen’s funeral, with Paris and Frankfurt also on the front foot.

On currency markets, the dollar held its strength ahead of the expected rate hike.

And while a jump in Japanese inflation to an eight-year high will cause a headache for the Bank of Japan, officials there are expected to maintain their ultra-loose policy to support the economy, despite the yen sitting at 24-year lows against the dollar.

Sterling was also struggling to bounce back, even as the Bank of England lines up another big increase.

Oil prices edged up but gains were capped by the strong dollar and worries about the economic outlook, while traders were also keeping tabs on Iran nuclear talks that could see Tehran resume crude sales.

Key figures at around 0810 GMT 

Tokyo – Nikkei 225: UP 0.4 percent at 27,688.42 (close)

Hong Kong – Hang Seng Index: UP 1.2 percent at 18,781.42 (close)

Shanghai – Composite: UP 0.2 percent at 3,122.41 (close)

London – FTSE 100: UP 0.4 percent at 7,267.78

Pound/dollar: UP at $1.1455 from $1.1434 on Monday

Euro/pound: DOWN at 87.60 pence from 87.69 pence

Euro/dollar: UP at $1.0034 from $1.0026

Dollar/yen: UP at 143.45 yen from 143.24 yen

West Texas Intermediate: UP 0.2 percent at $85.88 per barrel

Brent North Sea crude: UP 0.4 percent at $92.38 per barrel

New York – Dow: DOWN 0.2 percent at 30,765.98

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