September 26, 2023 (MLN): Markets fell further on Tuesday as investors grew increasingly fearful about the possibility of another US interest rate hike and the prospect of keeping rates elevated for an extended period to combat persistent inflation.
A small bounce on Wall Street was dismissed in early Asian trade, with a spike in US Treasury yields to fresh 16-year highs pushing the dollar even higher and reviving worries that the world's top economy could slip into a recession.
These concerns were compounded by the threat of a government shutdown in Washington as lawmakers struggled to iron out their differences on spending. This led to warnings that it could impact the US credit rating.
A recent surge in oil prices in recent months has raised fears that central banks' attempts to bring inflation down could be derailed after more than a year of tightening.
The US Federal Reserve indicated last week that it could hike borrowing costs again before the end of the year owing to a still-strong labor market and resilient economic data. This dealt a blow to many dealers who had been hoping that July's hike was the last.
Decision-makers also hinted that rates might have to be kept at more than two-decade peaks for some time.
"Rates will stay high," said Wei Li and other analysts at the BlackRock Investment Institute, adding that Treasury yields could go even higher. "Rising long-term bond yields show that markets are adjusting to risks in the new regime of greater macro and market volatility."
National Australia Bank's Tapas Strickland added that "the higher for longer view remains the prevailing theme" from the Fed meeting.
He mentioned that Fed Chicago boss Austan Goolsbee warned that not bringing inflation under control was a major risk to the economy, but the conversation would soon turn to how long to hold rates higher.
Meanwhile, Minneapolis Fed chief Neel Kashkari said he expected one more hike this year.
In early Asian trade, Tokyo, Hong Kong, Shanghai, Seoul, Singapore, Sydney, Taipei, and Wellington were all in negative territory.
China's Property Sector Woes:
On currency markets, the dollar was hovering around 11-month highs near 150 yen, putting the spotlight on authorities in Japan. The Japanese government has warned that it is willing to intervene if the moves become excessive.
However, analysts do not expect the yen to strengthen any time soon due to the Japanese central bank's refusal to move away from its ultra-loose monetary policy.
Investors are keeping a wary eye on developments in China as the country's troubled property sector comes back into focus after indebted developer Evergrande said it had missed an onshore bond repayment.
The firm had earlier announced that it would have to revisit its much-anticipated restructuring, citing weaker-than-expected sales, and scrapped a meeting of creditors.
"A huge amount of work has gone into the planning and formulation of Evergrande's restructuring plans, but if the sales forecasts underpinning the turnaround now appear unachievable, it is better to revisit the deal terms before scheme meetings are held," said Jonathan Leitch, a debt restructuring expert at law firm Hogan Lovells in Hong Kong.
US Political Concerns:
Squabbling in Washington is also causing some discomfort among investors as hardline Republicans in the House of Representatives block key spending bills.
The standoff, which could cause a government shutdown if an agreement is not reached by the weekend, led Moody's to warn that such a scenario would have negative implications for the country's top-tier credit rating.
A row over raising the debt limit earlier this year saw Fitch cut its rating, blaming rising deficits and political brinkmanship on Capitol Hill.
SPI Asset Management's Stephen Innes said: "In contrast to the debt limit, where Congress reached a deal due to the severe potential economic repercussions of an impasse, a government shutdown is viewed as relatively more manageable from a macroeconomic standpoint."
"However, this very fact, the less severe economic impact of a shutdown, paradoxically increases the likelihood that Congress may fail to take timely action."
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Posted on: 2023-09-26T09:36:18+05:00