Asian stocks fell for a fourth day after a sell-off in US markets deepened on Friday. Gold and crude oil eased as traders scrutinised the geopolitical situation in the Middle East. The yen briefly broke through 150 per dollar.
Oil fell below $88 a barrel, while gold edged further away from $2,000 an ounce amid signs that Israel’s ground offensive in Gaza had been delayed. US futures rose in Asian trade after the S&P 500 fell more than 1% on Friday, its worst week in a month. Treasury yields rose as traders refocused on the outlook for global interest rates.
Markets are beginning to scale back the bid for haven assets after Hamas released two US hostages and aid began to trickle across Egypt’s border with Gaza over the weekend. However, Israel has stepped up air strikes on Gaza in preparation for the “next phase” of its conflict with Hamas, while warning that Hezbollah risks dragging Lebanon into a wider regional war.
In currencies, the yen briefly weakened above 150 per dollar early on Monday, a closely watched level for possible intervention by Japanese authorities to support the currency. Bank of Japan officials are considering whether to tweak the settings of its yield curve control programme at its policy meeting next week, the Nikkei newspaper reported on Sunday, without saying where it got the information.
“Markets are again on high alert for a possible BOJ intervention,” Commonwealth Bank of Australia strategists including Joseph Capurso wrote in a note to clients on Monday. The yen is likely to remain under pressure this week “as the rise in the 10-year Japanese government bond yield amid growing speculation of BOJ policy tightening will do little to narrow Japan’s wide bond yield gap with the US”.
Aside from the Middle East crisis, global markets have been rattled in recent weeks by rising Treasury yields and growing concerns that interest rates will remain elevated for longer.
Federal Reserve Bank of Cleveland President Loretta Mester said that the US central bank is close to completing its tightening campaign if the economy performs as expected.
In equities, Australian, Japanese and South Korean shares fell and futures contracts in China pointed to declines on Monday morning after US stocks slumped on Friday. The S&P 500 broke through its 200-day moving average on Friday – seen by some as a bearish signal – and the VIX, Wall Street’s “fear gauge”, rose to its highest level since March.
While last week’s declines in the S&P 500 appeared largely orderly, the closest futures contracts linked to the Cboe Volatility Index – also known as the VIX and a measure of expected swings in America’s benchmark stock index – closed Thursday in a pattern known as backwardation. It’s a telltale sign of growing distress, as traders expect more volatility in the near term than further out.
This week, traders will be looking for clues on the outlook for global interest rates from inflation readings in Australia and Japan, as well as economic activity data in the US and Europe. Federal Reserve Chairman Jerome Powell is due to speak and the European Central Bank will make a policy decision later in the week.
