GLOBAL MARKETS-Asian shares steady but Fed disappointment hits bonds

BY Reuters | ECONOMIC | 04/17/24 02:14 AM EDT

(Updates prices as of 0545 GMT)

By Stella Qiu

SYDNEY, April 17 (Reuters) - Asian shares steadied from a recent sell-off on Wednesday although investors remain wary after the world's most powerful central banker had a change of heart on U.S. rate cuts this year, pushing Treasury yields to new five-month highs.

Europe is set for a subdued open, with EUROSTOXX 50 futures flat on the day. U.S. stock futures slipped 0.1% after Wall Street finished the day lower.

The dollar's surprising resilience this year is causing discomfort in Asia's currency markets. The beleaguered yen is plumbing fresh 34-year lows on an almost daily basis, the Chinese yuan is pinned near five-month troughs and Vietnam's dong is at record lows.

The New Zealand dollar gained 0.4% to $0.5902 after first-quarter inflation data showed domestically driven price pressures were surprisingly strong, adding to signs that the last mile to get inflation back to target could be bumpy.

On Wednesday, MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.1%, after plunging more than 4% in the past three sessions. Japan's Nikkei, however, dropped 0.8% to the lowest in two months.

Taiwanese shares outperformed with a gain of 1.6%, as the chip-making giant Taiwan Semiconductor Manufacturing Co (TSM) rose 2% ahead of its earnings results. Shanghai Composite index gained 1.2% after the securities regulator clarified the new listing rules to calm the recent market panic.

Fed Chair Jerome Powell said recent inflation data, with three months of upside surprises, had not given policymakers enough confidence to ease policy soon. He noted the central bank may need to keep rates higher for longer than previously thought.

Markets have already slashed the amount of easing expected this year to fewer than two rate cuts, a sea change from about six cuts predicted at the beginning of the year. The first rate cut is still expected in September, although the market's confidence in that has declined.

Two-year Treasury yields retested 5% overnight and were last at 4.9855%, while 10-years held near a five-month high at 4.6655% on diminishing expectations of Federal Reserve policy easing this year.

"Now Chair Powell has caved. Surprising in fact that we've not had a bigger reaction. But we think that's coming, or at least part of a process that will ultimately see the 10-year back in the 5% area," said Benjamin Schroeder, a senior rates strategist at ING, referring to U.S. Treasuries.

"Given what we have seen so far from the inflation data, the market would be excused had it decided to downsize the discount for a September cut in a more dramatic fashion."

The International Monetary Fund said on Tuesday the global economy is set for another year of slow but steady growth, with U.S. strength pushing world output through headwinds from lingering high inflation, weak demand in China and Europe and spillovers from two regional wars.

Geopolitical tensions in the Middle East are still running high. Israel vowed to respond to Iran's weekend attack despite international calls for restraint, although its war cabinet put off a meeting to decide on its response until Wednesday.

In currencies, the dollar index measuring the greenback against its major peers was buoyant near a 5-1/2-month high at 106.39. The beleaguered yen was last steady at 154.62 per dollar as the risk of government intervention loomed, although so far there has been no action from Tokyo apart from verbal warnings.

Asian bonds extended the sell-off in Treasuries. The 10-year Australian government bond yield rose 5 basis points to 4.371%, the highest this year.

In commodities, oil prices slipped on Wednesday as demand concerns outweighed heightened tension in the Middle East. Brent futures fell 0.5% to $89.53 a barrel, while U.S. crude dropped 0.7% to $84.81 a barrel.

Gold prices eased 0.2% to $2,376.79 per ounce, slipping away from a record high of $2,431.29.

(Reporting by Stella Qiu; Editing by Jamie Freed and Sam Holmes)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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