HONG KONG: Most Asian equities fell on Tuesday after the previous day’s global rout, but dip-buying helped pare early losses, while Europe saw gains, with attention turning to the Federal Reserve (Fed) as it prepares to ramp up interest rates to fight runaway inflation.
Panic has swept through trading floors since official data last Friday showed US consumer prices rising at their fastest pace in 40 years on account of a spike in energy and food costs caused by the war in Ukraine, China’s lockdowns and supply chain snarls.
The pain has been felt across all assets, with Bitcoin threatening to fall below $20,000 for the first time since December 2020; currencies retreating against the dollar; and even safe-haven plays, including the yen and gold, feeling the squeeze.
Investors are now focused on Wednesday’s Fed interest rate decision as it struggles to walk a fine line between reining in inflation and trying to keep the US economy on track.
“While tightening into a recession is no easy task, the Fed must indicate a willingness to raise interest rates by more than a half-percentage point at upcoming meetings if inflation continues to surprise to the upside,” Danielle DiMartino Booth of Quill Intelligence said.
But JP Morgan Asset Management’s warned: “While there is no doubt that inflation is a considerable challenge for the US at this point, slamming on the brakes too hard risks pushing the economy off its track.”
Before Friday’s news, expectations had been for a 50-point-basis hike, and a signal that more of the same was to come at the next few meetings. But now analysts say there is a 1 in 3 chance that Fed officials could announce a three-quarter-point increase, with some even predicting a one-percentage-point hike.
That has ramped up fears that the world’s top economy is heading for a recession, and on Monday Wall Street plunged, with the broad-based S&P 500 sinking into a bear market after dropping more than 20 percent from its recent peak.
But in Asia, dip-buying helped some markets bounce back to positive territory, and others pare the morning’s drop.
Sydney shed 3.6 percent, but was much better off than the initial losses of about 5 percent as traders there returned after a long weekend.
Tokyo, Seoul, Singapore, Wellington, Taipei and Manila were also lower. Hong Kong and Shanghai edged up in the afternoon, while there were also advances in Mumbai, Bangkok and Jakarta.
London, Paris and Frankfurt opened higher.
Commentators warned that the US central bank was in a tough place on what to do on Wednesday. A decision to lift rates more than a 0.50 percentage point could signal its determination to finally defeat inflation, but also hit its credibility as it confuses officials’ signals to traders.
“Once the Fed starts moving in 75s, it would be hard to stop, and the combination of this and the Fed’s outcome-based approach to inflation feels like it could be a recipe for recession,” Evercore ISI’s Krishna Guha and Peter Williams said.
But Stephen Innes of SPI Asset Management said there was “some positive read-through with the Fed front-loading and telegraphing a 75-basis-point move.”
“In that case, it not only allows the market to brace for impact, but could also mean rate hike clouds start dissipating sooner on the fourth-quarter horizon if an aggressive front-loading Fed snuffs out inflation.”
Bets on a run of sharp hikes have sent the dollar spiraling higher against other currencies, hitting a 24-year high against the yen on Monday and a record peak on the Indian rupee.
Both units have regained some of the losses but remain under severe pressure, while the euro is in danger of hitting a two-decade low. The pound is at its weakest level in two years.
And Bitcoin remains in the firing line, hitting $20,823 for the first time since December 2020, with selling compounded by news that crypto lending platform Celsius Network had paused withdrawals owing to volatile conditions. The announcement raised worries about a possible contagion for other firms.