Chinese Stocks Drop, US Stocks Rise amidst Speculation of Rising Interest Rates

A rally in Asian shares stalled on Thursday, weighed down by a drop in Chinese stocks and higher US yields, amid concerns that global central banks will continue to raise interest rates to combat sticky inflation.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.3%, reversing some of the previous session's 2.1 percent gain - the index's best day in two months. The Nikkei 225 in Japan, on the other hand, fell 0.2%.

Hong Kong's Hang Seng Index fell 0.1% after posting its biggest daily gain in nearly three months the previous day, thanks to unexpectedly strong readings from China PMI surveys.

Investors' enthusiasm for China's economic reopening has waned somewhat since Beijing lifted its strict COVID-19 controls in December, as analysts seek more evidence to gauge the pace of economic recovery.

Futures in the United States erased earlier gains, with the S&P 500 stock futures falling 0.5% and the Nasdaq futures falling 0.7%.

Tesla shares slumped 5.5 per cent in after-hour trading, after the Tesla Investor Day failed to excite investors. Engineers told investors that the company will cut vehicle assembly costs in future generations of cars by half.

"Financial markets are caught between two narratives: a softer landing, aided by China's reopening, and sticky inflation, which keeps policy rates higher for longer," said Chris Turner, global head of markets at ING."That will probably keep bond markets on the back foot and FX markets volatile in ranges."

Bonds and stocks took a beating overnight as inflation indicators from Germany and the United States reinforced expectations that interest rates would rise and stay there for a longer period of time.

Data released overnight showed that stubborn price pressures in Germany had not abated, despite unexpected inflation rises in Spain and France on Tuesday. The yield on Germany's 2-year government bonds has risen to its highest level since October 2008.

Manufacturing activity in the United States fell for the fourth consecutive month in February, but a measure of raw material prices rose last month, raising fears that inflation would remain stubborn.

"The PMI manufacturing data sends a mixed message to global risk appetite, with positive growth trends but stalling output prices," said Alan Ruskin, macro strategist at Capital Economics.

"In general, developed markets have a worse balance than emerging markets, because growth is weaker and inflation is more sticky."

The benchmark 10-year Treasury yield hit a new four-month high of 4.0160 percent on Thursday, after hitting 4% overnight. The two-year yield rose to 4.9080 percent, a new 15-year high.

Investors continue to expect the Fed to raise rates by 25 basis points at its next meeting later this month, but expectations of a larger 50 basis point increase have risen. The probability that the Fed's policy rate, which is currently set at 4.5 percent to 4.75 percent, will rise above 5.5 percent was 53%, up from 41.5 percent.

Minneapolis Fed President Neel Kashkari said he was inclined "to push up my policy path" after a recent government report showed the Fed's preferred inflation index accelerated in January to 5.4 percent annual rate, more than double the Fed's 2% target and slightly faster than the previous month.

In currency markets, the US dollar index, which measures the value of the greenback against a basket of major peers, rose 0.2 percent to 104.6.

The euro fell 0.2% to $1.0646, reversing some of its 0.8% gain overnight, as higher-than-expected German inflation added to pressure on the European Central Bank to raise interest rates.

Silvergate Capital shares fell as much as 28% in the crypto world after the cryptocurrency-focused bank said it was delaying its annual report and assessing its ability to operate as a going concern.

Oil prices were mostly stable on Thursday, after rising 1% the day before due to optimism about China's recovery. The price of US crude oil remained stable at $77.67 per barrel. Brent crude remained mostly unchanged at $84.34 per barrel.

Gold was down slightly. The spot price of gold was $1832.53 per ounce.