Asian stocks took a hit on Wednesday as U.S. bond yields soared to their highest levels since late July, unsettling investors ahead of key inflation data that could determine the pace of the Federal Reserve’s interest rate policies. The two-year Treasury yield surged to 4.367% on Tuesday, pushing the U.S. dollar to its strongest point against the yen in over three months.
The spike in yields comes as the U.S. market reopened following the Veterans Day holiday, reigniting investor concerns over potential fiscal changes under President-elect Donald Trump. His proposed policies, including lower taxes and higher tariffs, are expected to widen the fiscal deficit, increase government borrowing, and fuel inflation. This has led to a volatile market environment where stocks and bonds are clashing.
“Trump Trade” and Market Sentiment
The recent surge in bond yields reflects what analysts are calling the “Trump trade.” Kyle Rodda, senior financial markets analyst at Capital.com, noted, “It all continues to be a part of the Trump trade, which, at its core, is about deeper deficit spending.” Rodda highlighted the tension between equities and rising bond yields: “Higher risk-free rates strangle valuations.”
The initial optimism in U.S. stock markets post-election has cooled, with the S&P 500 futures pointing about 0.1% lower following a 0.3% dip overnight.
Asian Market Performance
The effects of rising U.S. yields extended across Asian markets. Hong Kong’s Hang Seng index slid 0.9%, with the mainland Chinese property subindex falling 1.3%. Chinese blue-chip stocks remained mostly flat. Meanwhile, Japan’s Nikkei and South Korea’s Kospi fell by 1.1% and 1.2%, respectively. Australia’s benchmark ASX 200 also dropped 1.1%, weighed down by declining commodity shares.
In commodities, copper prices fell 2% to a two-month low on the London Metal Exchange as concerns over Trump’s tariff policies and weaker Chinese demand dampened sentiment. Brent crude futures edged up slightly by 0.2% to $72 per barrel, while U.S. WTI crude remained at $68.26 after hitting its lowest levels since late October. Gold managed a modest 0.4% recovery to $2,607 per ounce after dropping to a nearly two-month low in the previous session.
Currency Movements and Potential Japanese Intervention
The U.S. dollar’s strength against the yen caught attention, hitting 154.94 yen for the first time since late July before settling at 154.56 yen. This exchange rate approached the 155-yen-per-dollar level that could prompt action from Japanese authorities. Atsushi Mimura, Japan’s finance ministry currency chief, remarked last week that officials were “ready to take appropriate actions if necessary when excess moves are seen.”
The U.S. dollar index, which measures the greenback against a basket of major currencies, stood at 105.92, close to its strongest level since May 1. Meanwhile, the euro weakened, reaching $1.0595 overnight, its lowest in a year, before slightly rebounding to $1.0625.
Inflation Data and Fed Rate Expectations
The upcoming U.S. consumer price index (CPI) report is critical, as it will inform the Fed’s policy direction. Economists expect a 0.3% monthly rise in the core CPI, and a hotter reading could reduce the likelihood of a Fed rate cut in December. Currently, CME Group’s FedWatch Tool shows a 60% probability for a quarter-point rate cut at the Fed’s December 18 meeting, down from 77% a week earlier.
Europe’s Outlook Amid Trade Concerns
The European economy is also under pressure due to Trump’s stance on trade. He previously warned that the EU would “pay a big price” for insufficient U.S. export purchases, raising fears of new tariffs. This adds to the challenges Europe faces, further exacerbated by weaker global demand and stagnant growth.
Commodities and Energy Sector
OPEC’s recent downgrade of its global oil demand forecast highlighted ongoing weakness in China and other regions, keeping oil prices subdued. Brent crude’s slight rise and WTI’s marginal increase did little to lift the sector’s overall outlook. The strength of the U.S. dollar continued to pressure commodities, making them more expensive for holders of other currencies.
The sharp rise in U.S. bond yields and Trump’s fiscal policies have created a volatile environment for global markets, with Asian stocks leading the decline amid growing inflation concerns. As investors await key U.S. inflation data, the balance between bond and equity markets will remain delicate. The potential for intervention by Japanese authorities and the uncertainty surrounding U.S.-European trade relations add further layers of complexity to the economic landscape.