Asian stocks sink, yields rise as markets brace for aggressive Fed

By Kevin Buckland

TOKYO (Reuters) – Stocks in Asia fell and bond yields rose on Wednesday as investors braced for another aggressive US Federal Reserve rate hike later in the day.

Japan’s Nikkei fell 1.26% to hit a two-week low. Australia’s benchmark stock index fell 1.35% and South Korea’s Kospi fell 0.9%.

Chinese blue chips lost 0.82%, while Hong Kong’s Hang Seng lost 1.26%.

MSCI’s broadest index of Asia Pacific equities lost 1%.

This follows an overnight sell-off on Wall Street that dragged the S&P 500 down 1.13%, although futures on Wednesday pointed to a slightly higher open.

The Fed made headlines for a week as more than a dozen central banks announced monetary policy decisions, including the Bank of Japan and the Bank of England on Thursday.

Sweden’s Riksbank surprised markets overnight with a full percentage point hike and warned of further moves in the next six months.

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Despite this, bets on Fed tightening remained stable.

Markets are pricing in an 81% chance of another 75 basis point gain and a 19% chance of a full percentage point gain.

Global yields rose on expectations of further tightening.

The two-year US Treasury yield hit a near 15-year high of 3.992% on Tuesday and remained elevated at 3.9516% in Tokyo trading, while the 10-year Treasury yield hit its highest level in over a decade.

It reached 3.604% for the first time since April 2011 and was last at 3.5473%.

Australia’s benchmark 10-year yield rose to a near three-month high of 3.789%, and South Korea’s corresponding yield hit its highest level since April 2012.

Markets “appear well positioned for a 75 basis point hike alongside a hawkish update” from the Fed, wrote Taylor Nugent, market economist at National Australia Bank in Sydney, in a note to clients.

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“The post-meeting comment and updated points will be crucial,” Nugent said, adding that NAB is targeting a policy rate of “about 4%” by the end of this year, with no rate cuts expected until 2024.

The US Dollar Index, which measures the currency against six major peers, edged up to 110.22, getting closer to this month’s 20-year high of 110.79.

The greenback was little changed at 143.64 yen after attempting to hit 145 twice this month, a level last seen 24 years ago.

This week, the BOJ will cement its position as the lone dove among advanced-economy central banks by sticking to its highly accommodative policy, which pins the 10-year Japanese government bond yield near 0%.

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The bank on Wednesday offered to buy 250 billion yen worth of bonds in an unscheduled operation to keep yields in check.

Sterling was around $1.1372, staying close to Friday’s 37-year low of $1.1351.

Markets are divided on whether the BOE will opt for a 50 or 75 basis point hike on Thursday.

Meanwhile, crude oil continued to decline amid fears that aggressive tightening by the Fed and other central banks would hurt growth and dampen demand.

Brent crude futures fell 26 cents at $90.36 a barrel after falling $1.38 the previous day.

US West Texas Intermediate crude was at $83.74 a barrel, down 20 cents. The October delivery contract ended Tuesday down $1.28, while the more active November contract lost $1.42.

(Reporting by Kevin Buckland; Editing by Ana Nicolaci da Costa)

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