Asian shares eked out modest gains on Thursday, clawing back sharp losses from earlier this week, however, rising U.S. bond yields and interest rates could dampen investors’ optimism toward the global economic outlook.
The U.S. Federal Reserve flagged interest policy tightening later this year and upgraded inflation outlook, at its policy meeting that ended on Wednesday, its first in 2018 and last to be chaired by Janet Yellen, who will be replaced by governor Jerome Powell on Feb 3. It kept interest rates on hold as expected.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.1 percent in early trade, slowly recovering after Tuesday's 1.4 percent fall. Japan's Nikkei .N225 also gained, rising 1.3 percent from a four-week low hit the previous day.
U.S. S&P 500 mini futures ESc1 gained 0.4 percent in Asian trade on Thursday, helped by 1.4 percent gains in Facebook (FB.O) in after-hours trading following the company’s solid earnings.
Later in the day, three U.S. tech giants, Apple (AAPL.O), Google parent Alphabet (GOOG.O) and Amazon.com (AMZN.O) will announce earnings.
Investors have been expecting strong profit growth in U.S. firms due to a sound global growth, with U.S. President Donald Trump’s tax cuts seen giving an additional boost to Corporate America’s bottom line.
Economic data released overnight underscored the strength of the global economy. ADP payrolls data in the United States showed job increases of 234,000 in January, 49,000 more than economists’ forecast.
Caixin/Markit Manufacturing Purchasing Managers’ Index, a private business survey, came at 51.5, matching December’s reading, which was the highest in four months, showing growth in China’s manufacturing sector remained elevated in January.
“The U.S. is cutting tax and spending $1.5 trillion in infrastructure when the economy is really strong. There would be little wonder if the economy overheats,” said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
For a growing number of investors, the biggest worry now is that the economy may accelerate too fast, lifting inflation and prompting central banks to tighten their monetary policy faster.
The yield on the 10-year U.S. Treasury note - the benchmark for world lending - briefly shot up to 2.754 percent, a level last seen in April 2014. It last stood at 2.725 percent US10YT=RR. Investors’ inflation expectations have also risen to 3 1/2-year high of 2.12 percent based on the so-called breakeven inflation (BEI) rate calculated by the gap between conventional bonds and inflation-protected bonds US10YTIP=RR.
U.S. interest rate futures are now almost fully pricing in three rate hikes this year, compared to twice at the start of year, with some now talking about the possibility of four rate hikes.
“The dollar’s weakness and higher oil prices are boosting inflation expectations in the United States, which in turn is boosting U.S. bond yields,” said Shuji Shirota, head of macro economic strategy at HSBC Securities. (BBC)
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