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Asian shares extend global selloff amid bets on more aggressive Fed

An electric stock quotation board is displayed in the conference hall in Tokyo, Japan November 1, 2021. REUTERS/Issei Kato

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  • Nikkei tumbles 2.3%, S&P 500 futures stabilise
  • Dollar holds firm, hovers near 24-yr high against yen
  • 2-yr U.S. yields scale new 15-yr most of 3.8040%
  • U.S. yield curve remains deeply inverted

SYDNEY, Sept 14 (Reuters) – Asian shares tumbled, the dollar held firm and two-year Treasury yields hit a fresh 15-year on top of Wednesday, as a U.S. inflation report dashed hopes for a peak in inflation, fuelling bets rates may need to be raised higher for longer.

U.S. Labor Department data showed on Tuesday the headline Consumer Price Index gained 0.1% monthly versus expectations for a 0.1% decline. Specifically, core inflation, stripping out volatile food and energy prices, doubled to 0.6%. read more

Wall Street saw its steepest fall in 2 yrs, the safe-haven dollar posted its biggest jump since early 2020, and two-year Treasury yields, which rise with traders’ expectations of higher Fed fund rates, jumped to the best level in 15 years.

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MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 2.1% on Wednesday, dragged lower by way of a 2.7% plunge in resources-heavy Australia (.AXJO), a 2.4% drop in Hong Kong’s Hang Seng index (.HSI) and a 1% fall in Chinese bluechips (.CSI300).

Japan’s Nikkei (.N225) tumbled 2.3%.

Following a heavy equity selloff overnight, both S&P 500 futures and Nasdaq futures rose 0.3%. On Tuesday, the Dow Jones Industrial Average (.DJI) plunged 3.94%, the S&P 500 (.SPX) lost 4.2%, and the Nasdaq Composite (.IXIC) dropped 5.16%.

“Markets have reacted violently from what I’d consider to become a modest miss in U.S. CPI,” said Scott Rundell, chief investment officer at Mutual Limited.

“Futures have stabilised, so we may visit a dead-cat bounce tonight.”

Financial markets will have fully priced within an interest hike of at the very least 75 basis points towards the end of the FOMC’s policy meeting in a few days, with a 38% possibility of a super-sized, full-percentage-point increase to the Fed funds target rate, in accordance with CME’s FedWatch tool.

Each day earlier, the likelihood of a 100 bps hike was zero.

“USD rates are actually pricing in a Fed funds rate of 4.25% by end-2022 (75bps, 75bps, 25bps for the rest of the three meetings). Decent probability of a 4.5% peak early 2023 can be reflected,” said Eugene Leow, senior rates strategist at Deutsche Bank.

“While resilient growth and slowing inflation could make for an improved risk taking environment, the U.S. economy now looks too hot still. Without clear signs of the labour market slowing and inflation still problematic, a downshift from the Fed looks set to be delayed again.”

In the foreign currency markets, the U.S. dollar held firm against a basket of major currencies at 109.8, after jumping 1.4% overnight on the surprisingly strong U.S. inflation report.

It hovered near its 24-year peak contrary to the rate-sensitive Japanese yen at 144.4 yen. The yen is a victim of the dovish monetary stance from the lender of Japan, on the other hand with rate hikes elsewhere.

The two-year U.S. Treasury yield scaled a fresh 15-year most of 3.8040% on Friday before retreating to 3.777%, and its own curve gap with the benchmark ten-year yields hovering around 34 basis points, weighed against just 16 bps yesterday.

The yield curve inversion is normally treated as a warning of recession.

The yield on 10-year Treasury notes rose to 3.4273% weighed against its U.S. close of 3.423% on Tuesday.

Oil prices recovered some ground on Friday, after falling in the last session. U.S. crude settled up 0.3% at $87.57 per barrel and Brent settled at $93.38, up 0.2% on your day.

Gold was slightly higher. Spot gold was traded at $1701.7526 per ounce.

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Reporting by Stella Qiu; Editing by Stephen Coates and Ana Nicolaci da Costa

Our Standards: The Thomson Reuters Trust Principles.

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