Stocks Down as Focus Turns to US CPI, Yen Surges: Markets Wrap

(Bloomberg) — Asian stocks slipped and bonds rose Wednesday on growth concerns ahead of a US inflation report. The yen gained after a Bank of Japan official signaled more interest rate increases.

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A gauge for the region’s equities fell for a third session, with benchmarks in Japan and Hong Kong leading declines. Futures for US stocks dropped. Global growth worries resurfaced as oil steadied below $70 and Treasury yields fell in the run-up to the US consumer price index later Wednesday and the Federal Reserve policy meeting next week.

The yen advanced to its strongest level against the greenback since January after BOJ policy member Junko Nakagawa said the central bank will continue to adjust the degree of easing. Most economists surveyed expected the central bank to wait until December or January before raising rates again, with the next decision scheduled for next week. Emerging market currencies gained against a weaker greenback.

Investor sentiment is still being driven by the bleak outlook for the Chinese economy and worries that the Federal Reserve has waited too long to ease monetary policy. Traders are leaning toward at least one super-sized Fed rate cut this year ahead of consumer price report which is expected to show another month of muted increases. Australian bonds tracked the move in Treasuries.

In a presidential match-up between between Vice President Kamala Harris and former President Donald Trump, topics ranged from their plans for the economy to US-China relations and immigration. As the debate closed, the odds for victory for Harris climbed to around 55% on PredictIt.

“On markets today, there is a lot of uncertainty ahead of next week’s expected rate cut,” said Kieran Calder, head of equity research for Asia at Union Bancaire Privee in Singapore. “Against this backdrop there are several factors which are more likely driving weaker sentiment and markets lower – lower oil, weaker China, stronger yen.”

Markets continued to look for cues on the future direction of US-China relations during the debate, with defense, biotechnology and banking companies in the region under the microscope. Trump’s support of the crypto sector saw Bitcoin slip as the former president’s odds for victory briefly dipped on PredictIt.

The Japanese currency rallied to 141.51 versus the greenback, the strongest level since Jan. 2. Nakagawa’s comments underpin the BOJ’s message that it will raise rates further if conditions are right, a stance signaled recently by BOJ board members including Governor Kazuo Ueda. The central bank announced an interest-rate hike and a reduction in bond purchases in its previous meeting on July 31.

Nakagawa’s comments on real rates “make markets think the BOJ may hike rates earlier and faster, possibly this year,” pushing up the yen, said Shoki Omori, chief desk strategist at Mizuho Securities Co. “The presidential debate adds to uncertainty” over the market and contributing to the yen’s volatility, he said.

Traders in the US interest-rate options market are still betting on at least one 50 basis-point Fed interest-rate cut this year — just probably not before the Nov. 5 US election.

“Given the market’s aggressive expectations for Fed rate cuts, a hotter reading should lead to downside volatility,” said Sameer Samana at Wells Fargo Investment Institute. “A cooler print has more two-way risk as it creates more room for the Fed to cut, but may also indicate the economy is slowing faster than anticipated.”

Crude has tumbled by almost a fifth so far this quarter on concerns that slowing growth in the US and China, the leading consumers, will crimp demand at a time of robust and expanding supplies. West Texas Intermediate crude rebounded in early trading after plummeting as much as 5% in its previous session. Copper and aluminum also fell after Chinese trade data offered evidence of weakening domestic demand for metals.

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