Equities advance as bonds retreat on hawkish Fed

March 23, 2022: Most Asian stock markets rose on Wednesday as investors exited bond markets on hawkish central bank prospects, while currencies came under pressure from a stronger U.S. dollar and uncertainties about the Ukraine conflict.

Malaysian equities advanced about 1%, hitting their highest in more than two weeks, as the 10-year benchmark yield jumped to a level not since mid-February. Equities in South Korea and Singapore climbed up to 0.7% each.

Currencies in the region were mixed, with the South Korean won firming 0.5% after two days of weakness, while the Thai baht, Singapore dollar and the Philippine peso dipped slightly.

Bonds in emerging Asian countries have taken a beating after U.S. Federal Reserve Chairman Jerome Powell signalled on Monday the central bank's readiness to hike interest rates more aggressively to tame inflation, sparking a sell-off in U.S. Treasuries.

Yields move inversely to bond prices but for investors, both prices and yields determine the returns they earn.

Indonesian bonds, already one of the highest yielding in the region, witnessed a sell-off as hawkish comments from Fed officials prompted investors to switch to developed markets, also resulting in reduced interest from buyers at bond auctions which raised money well below target.

Yields on the country's 10-year benchmark bond were up 3.7 basis points at 6.767%, their highest in nearly two weeks, while those on the five-year instrument rose 5.3 basis points to 5.635%, a level not seen since March 10.

Meanwhile, the intensifying conflict between Ukraine and Russia has overshadowed emerging markets over the past few weeks as gyrating commodity prices and supply chain disruptions pose threats of inflation and weak external demand.

"While the region's direct trade exposure to Russia and Ukraine is relatively small, the surge in imported price pressures will still likely beat down consumer and business confidence, in turn creating headwinds against the nascent recovery in domestic demand," analysts at Barclays said.

Accommodative policy conditions, slow but steady weakening in external demand and measures to improve food security can reduce the region's exposure to Russia-Ukraine, but it is still likely to experience weaker growth and stronger inflation, they said.

Oil prices edged lower overnight on a reduced likelihood of the European Union banning Russian oil, providing some relief to oil-importing countries in Asia. However, prices resumed their upward trend on Wednesday after data showed U.S. crude stocks fell last week.

Shares in the region's top oil-importing countries such as India and Thailand edged higher. Barclays expects India, Thailand and the Philippines to be the slowest in normalising monetary policy, with Thailand seen not hiking rates anytime this year.

The Philippine central bank is expected to leave its policy unchanged on Thursday to support economic recovery, a Reuters poll showed.

Reuters