Asian Stocks Drop In Response to US and EU Interest peaks, Dollar Climbs

Asian stocks fell on Monday (Feb 27) as markets were forced to price in ever-higher US and European interest rate peaks, slamming bonds globally and pushing the dollar to multi-week highs.

Investors are bracing for more difficult US data, including the closely watched ISM manufacturing and services measures, the latter of which is especially important following January's unexpected surge in activity.

This week, at least six Federal Reserve policymakers are scheduled to speak, providing a running commentary on the likelihood of further rate hikes.

China is conducting manufacturing surveys, and the National People's Congress begins this weekend, with new economic policy targets and policies, as well as a reshuffling of government officials.

Asian stocks fell on Monday (Feb 27) as markets were forced to price in ever-higher US and European interest rate peaks, slamming bonds globally and pushing the dollar to multi-week highs.

Investors are bracing for more difficult US data, including the closely watched ISM manufacturing and services measures, the latter of which is especially important following January's unexpected surge in activity.

This week, at least six Federal Reserve policymakers are scheduled to speak, providing a running commentary on the likelihood of further rate hikes.

China is conducting manufacturing surveys, and the National People's Congress begins this weekend, with new economic policy targets and policies, as well as a reshuffling of government officials.

JPMorgan's head of economic research, Bruce Kasman, has raised the ECB's forecast by another quarter-point, bringing it to 100 basis points. On Friday, Germany's 2-year bond yield surpassed 3.0 percent for the first time since 2008.

"The risk is clearly skewed towards more Fed action," Kasman says.

"Demand is proving resilient in the face of tightening, and lingering supply damage from the pandemic is limiting inflationary moderation," he added. "The transmission of the rapid shift in policy that is still underway raises the risk of a recession that central banks did not intend."

According to the Atlanta Fed's influential GDP Now tracker, the US economy grew an annualised 2.7% in the first quarter, indicating no slowdown from the previous quarter.

Higher interest rates and yields stretch equities valuations, particularly those with high PE ratios and low dividend payouts, which includes much of the technology sector.

Shares in the United States trade at approximately 17.5 times forward earnings, compared to 12 times for non-US shares.

Ten-year Treasury bonds also yield more than twice the estimated dividend yield of the S&P 500 Index while carrying far less risk.

With earnings season nearly over, approximately 69% of earnings have surprised on the upside, compared to a historical average of 76%, and annual earnings growth is running around -2%.

The rise in Fed expectations has boosted the US dollar, which rose 1.3 percent against a basket of currencies last week to 105.220.

After hitting a seven-week low of 1.0536 on Friday, the euro was pinned at 1.0548.

The dollar surpassed the yen for the first time in nine weeks, reaching 136.40, aided in part by dovish comments from top Bank of Japan policymakers.

The rise in the dollar and yields has weighed on gold, which fell 1.7% last week and was last trading at $1,812 per ounce.

Oil prices rose marginally as the prospect of lower Russian exports was offset by rising US inventories and global concerns.

Brent rose 35 cents to US$83.51 per barrel, while US crude gained 34 cents to US$76.66.