U.S. yields rise, Asian shares slump as Powell warns on inflation

Passersby wearing protective face masks walk past a stock quotation board, amid the coronavirus disease (COVID-19) pandemic, in Tokyo, Japan January 25, 2022. REUTERS/Issei Kato

SHANGHAI, Jan 27 (Reuters) – Asian shares tumbled to their lowest in nearly 15 months, short-term U.S. yields rose to 23-month highs and the dollar strengthened on Thursday after the Federal Reserve’s chairman signalled plans to steadily tighten policy.

At the same time, rising investor concerns over political tensions between Russia and Ukraine exacerbated worries over tight energy market supply, keeping oil prices elevated at multi-year highs despite some profit-taking.

In its latest policy update on Wednesday, the Fed indicated it is likely to raise U.S. interest rates in March, as has been widely expected, and reaffirmed plans to end its bond purchases that month before launching a significant reduction in its asset holdings.

But in the follow-up press conference, Powell warned that inflation remains above the Fed’s long-run goal and supply chain issues may be more persistent than previously thought. read more

“There was a marked shift in terms of a relatively dovish statement and then a relatively hawkish press conference,” said David Chao, global market strategist, Asia Pacific (ex-Japan) at Invesco.

“Powell (is) not committing to the size or the frequency of rate hikes and also the timing of the balance sheet reduction. I think that buys him a bit of wiggle room as to how quickly and with what velocity he wants to normalise monetary policy in the U.S. … it’s very data dependent and so we’re certainly watching other economic data that’s going to be released especially inflation data, inflation expectations data, which I think could trigger more aggressive monetary policy tightening.”

Fed funds futures showed traders pricing in as many as five hikes by December, after previously fully pricing for four increases. FEDWATCH

Concerns that the Fed will increasingly prioritise fighting inflation walloped share markets. MSCI’s broad gauge of regional markets outside Japan (.MIAPJ0000PUS) fell more than 2% on Thursday to its lowest level since Nov. 5, 2020.

Hong Kong’s Hang Seng index (.HSI) and Australian shares (.AXJO) fell more than 2% and Chinese blue-chips (.CSI300) dropped to their lowest level since Sept. 30, 2020 as Refinitiv flows data pointed to heavy selling by foreign investors through the country’s Stock Connect scheme. (.NQUOTA.SH), (.NQUOTA.ZK)

In Tokyo, the Nikkei fell more than 2.5%, touching its lowest point since Nov. 26, 2020.

The drop echoed a sharp reversal in U.S. shares…