HONG KONG: Asian markets sank on Wednesday as an upbeat assessment of the US economy by Federal Reserve boss Jerome Powell fanned new fears of a sharp rise in interest rates.
In his closely watched debut in front of lawmakers the new central bank boss said his view of the outlook had strengthened since December, when Donald Trump pushed through massive across-the-board tax cuts.
While a positive sign for the world’s top economy, the appraisal spooked investors — already on edge over the prospect of higher borrowing costs — into betting on four rate hikes this year rather than the three previously expected.
Stephen Innes, head of Asia-Pacific trading at OANDA said Powell’s tone suggested he would be moderate, but added that “his pointer at the topside potential for both inflation and growth suggests the risks are skewed for a bolder monetary policy response”.
The Fed boss’s comments sent all three main Wall Street indexes plunging more than one percent and the dollar surging against most other currencies.
The yield on the key 10-year US Treasury bond, a proxy for interest rates, also jumped.
World markets suffered a sharp drop at the start of February after strong jobs and wages data sparked concerns that inflation would surge, and in turn force the Fed to ramp up borrowing costs.
On Wednesday, Hong Kong and Shanghai each fell more than one percent, Tokyo was 0.4 percent lower and Sydney dropped 0.4 percent.
Singapore eased 0.1 percent and Seoul was off 0.5 percent, with Manila sharply lower.
However, Jim McDonald, Northern Trust Corp’s chief investment strategist, remained upbeat.
“If they do go four times, we think it’s going to be for the right reasons — which is that growth is good, inflation is not out of control,” he told Bloomberg TV. “That will not be a bad environment for risk-taking.”
With bets piling on higher interest rates, the dollar rallied on Tuesday but was unable to hold the gains against the yen, euro and pound in Asian trade.
However, it did rack up strong gains against other regional currencies, with the Australian dollar down 0.7 percent and South Korea’s won almost one percent down. The Thai baht, Indonesian rupiah and New Zealand dollar were also well down.
Mexico’s peso, the South African rand and Canadian dollar were also almost one percent off.
On oil markets, crude extended Tuesday’s slide of more than one percent as a stronger dollar makes the commodity more expensive for holders of other currencies.
Also, traders were weighing the prospect of rising US output at the same time as OPEC and Russia reconsider tapering their own production cap in 2019.
Key figures around 0230 GMT
Tokyo – Nikkei 225: DOWN 0.4 percent at 22,309.05 (break)
Hong Kong – Hang Seng: DOWN 1.1 percent at 30,935.05
Shanghai – Composite: DOWN 1.3 percent at 3,249.42
Euro/dollar: UP at $1.2234 from $1.2227 at 2130 GMT
Pound/dollar: UP at $1.3905 from $1.3902
Dollar/yen: DOWN at 107.24 yen from 107.38 yen
Oil – West Texas Intermediate: DOWN 42 cents at $62.59 per barrel
Oil – Brent North Sea: DOWN 40 cents at $66.23 per barrel
New York – DOW: DOWN 1.2 percent at 25,410.03 (close)
London – FTSE 100: DOWN 0.1 percent at 7,282.45 (close)