Asian and European stock futures fell, while Treasury yields and the dollar rose, in a sign that investors have yet to fully recalibrate interest rate expectations.
US stock futures were also lower as contracts on the S&P 500 and Nasdaq 100 indexes all but wiped out Monday’s gains on Wall Street. A drop in Euro Stoxx 50 contracts pointed to a fourth consecutive session of losses for the region-wide benchmark.
In Asia, property worries continued to weigh on Chinese markets. Hong Kong’s Hang Seng Index fell to levels last seen in November and mainland benchmarks were lower, reflecting a gloomy mood across the region.
A gauge of Chinese property developers fell further after suffering its biggest drop in nine months on Monday amid fresh signs of turmoil in the sector. China Evergrande Group missed a debt payment and former executives were detained. That added to fears about the sector’s debt pile and heightened concerns that global growth will stall as the economic engine of the world’s second-largest economy sputters.
Stock benchmarks for Japan, South Korea and Australia all fell, with losses in South Korean equities dragging the Kospi index down as much as 1.3%.
Those declines put the MSCI All Country World Index, one of the broadest measures of global equities, on track for its longest losing streak in a decade after closing lower for a seventh straight session on Monday.
Treasury yields continued to climb after the 10-year rate jumped 11 basis points to a 16-year high on Monday, trading above 4.54%. The momentum carried over to Asia, with Australian and New Zealand yields also rising.
Jamie Dimon, chairman and chief executive of JPMorgan Chase & Co, floated the idea that US rates could reach 7%, a worst-case scenario that could catch consumers and businesses off guard.
“Rates will stay high,” BlackRock Investment Institute analysts including Wei Li, global chief investment strategist, wrote in a note. Quantitative tightening and Treasury issuance in the US could push yields higher in the near term. “Rising long-term bond yields show that markets are adjusting to the risks in the new regime of higher macro and market volatility.”
Rising yields supported the dollar. The Bloomberg Dollar Index held gains from Monday, when it closed at its highest level since December. The yen steadied after weakening to a one-year low after Bank of Japan officials doubled down on the message that stimulus is still needed.
A warning from Moody’s Investors Service that a US government shutdown would have a negative impact on America’s credit rating did little to change market sentiment on Monday. Concerns about a shutdown could intensify later this week as the 1 October deadline approaches.
Crude oil prices fell for a second session on Tuesday. Traders are increasingly concerned that rising oil prices risk fuelling inflation, making it difficult for policymakers to cut interest rates any time soon. Hedge funds have increased their exposure to oil on bets that tightening supplies will boost demand.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said he expected US interest rates to rise again this year given the robust economy. These sentiments echoed comments last week from Boston Fed President Susan Collins, who said further tightening was “certainly not off the table”, while Fed Governor Michelle Bowman signalled that more than one hike would likely be needed.
Meanwhile, Chicago Fed President Austan Goolsbee said on Monday that it’s still possible for the US to avoid a recession. “I’ve called it the golden path, and I think it’s possible, but there are a lot of risks and it’s a long and winding road,” he said in a CNBC interview.
“There are several reasons to believe that the full impact of tighter monetary policy has yet to be felt,” said Henry Allen, a strategist at Deutsche Bank. “As such, it will be some months before we can give the all-clear to the economy, not least because longer-term interest rates are still hitting new highs even now.”
