Asian equities fell to a three-week low on Thursday after the US Federal Reserve stunned investors by signalling it might raise interest rates at a much faster pace than assumed, sending bond yields and the dollar sharply higher.
The dollar boasted its strongest single day gain in 15 months as 10-year US Treasury yields jumped by the most since early March.
The fallout in equities was softer, but enough to push MSCI’s broadest index of Asia-Pacific shares outside Japan down about 0.6 per cent to its lowest since late May.
Japan’s Nikkei fell 1 per cent and S&P 500 futures were 0.4 per cent lower in Asian trade.
Emerging markets might not hold up as well, as they are vulnerable to the chance that early US rate hikes suck funds out of riskier assets – though selling pressure was only moderate in Asia and EM currencies stabilised.
“The new Fed ‘dot plot’ indicating that the median FOMC member now forecasts two Fed rate hikes in 2023, versus none in the March iteration, represented the hawkish surprise out of the June Fed meeting,” said Ray Attrill, head of FX strategy at NAB.
The Fed forecasts, or dot plots, showed 13 of the 18-person policy board saw rates rising in 2023 versus only six previously, while seven tipped a first move in 2022.
While the plots are not commitments and have a poor track record of predicting rates, the sudden shift was still a shock.
The Fed rubbed salt into the wound by signalling it would now be considering whether to taper its asset purchases meeting by meeting and downgraded the risk from the pandemic given progress in vaccination.
Analysts at JPMorgan noted Chair Jerome Powell was not as aggressive in his media conference.
“It appears that faster progress toward reopening and higher inflation surprises revealed some hawks on the FOMC, but we suspect that leadership is predominantly anchored at zero or one hike in 2023,” they said in a note.
“We continue to look for lift-off in 2023, with tapering starting early next year.”
Markets moved quickly to price in the risk of earlier action and Fed fund futures shifted to imply a first hike by the end of 2022. Yields on 10-year bonds shot up almost nine basis points to 1.57 per cent.
The dollar smashed up out of recent tight ranges, rising 0.9 per cent overnight against a basket of currencies to 91.387 for its biggest gain since March last year.
The euro was kept at five-week lows of $1.1990 having shed 1.1 per cent overnight, the sharpest fall since March 2020. The dollar also surged to 110.69 yen and looked set to test its 2021 peak at 110.96.
However the kiwi clawed back about half of its overnight losses after first-quarter growth figures blew past forecasts.
The Australian dollar and emerging market currencies stabilised.
The rise in bond yields and the dollar were a double blow for non-yielding gold which was down at $1,821 an ounce after sliding 2.5 per cent overnight.
Oil prices were insulated by the prospect of stronger worlddemand and still tight supply, with Brent reaching its highestsince April 2019 before running into profit taking and headwindsfrom the sharply higher dollar.
Brent was last off 1 per cent at $73.57 a barrel, while UScrude lost 1 per cent as well to trade at $71.41.