GLOBAL MARKETS-War and prospect of rate hikes hoist dollar, gilt wipeout hits Treasuries

By Selena Li

HONG KONG, Oct 11 (Reuters) – Asian stock markets fell and the dollar rose on Tuesday, as investors worried about rising interest rates and an escalation in the Ukraine war, while government bond yields surged amid a worrying collapse in Britain’s government bond market Gilts bounced off global bond markets.

MSCI’s broadest index of Asia-Pacific stocks outside of Japan fell 1.7% to a two-year low, led by a deeper decline in chipmakers and Chinese tech stocks amid US export restrictions aimed at squeezing Chinese tech development affect.

Japan’s Nikkei fell 2%. Risk-sensitive Australian and New Zealand dollars hit 2-1/2 year lows.

“Risk aversion has dominated,” said Rodrigo Catril, currency strategist at National Australia Bank, while renewed Russian attacks on Ukrainian cities and global recession fears unsettled markets.

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“Sentiment was also not helped by a major sell-off in global core bonds led by UK gilts, despite a spate of announcements aimed at calming UK debt markets,” he added.

Treasury yields surged as trading resumed after the US bank holiday on Monday, with 30-year yields rising 11 basis points to a nearly nine-year high of 3.956%.

Bonds around the world have been swept aside by the slide in gilts on fears that pension funds will be forced into fire sales, and UK promises of more tax detail and additional Bank of England emergency measures have done little to stem selling.

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The backdrop, meanwhile, is ever-higher interest rates and the nerves are on Thursday’s release of US inflation data, which could set the stage for another big Federal Reserve rate hike in November.

“Inflation is stubborn and the Fed needs to go beyond what the market is expecting,” said Tai Hui, chief strategist for the Asia-Pacific market at JP Morgan Asset Management.

Futures pricing shows that traders are positioned there with about a 90% chance of a 75 basis point Fed hike next month and a 4.5% Fed interest rate through February and much of 2023.

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That prospect gives dollar bulls another run and pushes the greenback toward the milestone highs it hit last month.

The Aussie hit a 2-1/2 year low of $0.6260 and the Kiwi hit a low of $0.5541 in the Asia session.

The euro fell 0.2% to $0.9685, drifting back to September’s 20-year low of $0.9528. Sterling was under pressure, falling 0.2% to $1.1025.

At 145.75 per dollar, the Japanese yen was just a few pips below the level that led to official support a few weeks ago.

Brent crude fell slightly to $95.91 a barrel. Spot gold fell 0.1% to $1,663 an ounce.

(Reporting by Selena Li; Editing by Tom Westbrook and Simon Cameron-Moore)

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