Rate pressure on Asia’s markets, while the dollar rises

On Monday, Asian shares dropped to their lowest level in two months as markets were forced to adjust to ever-higher peaks for U.S. and European interest rates, leading to a slump in bonds worldwide and supporting the dollar at multi-week highs. Investors are anticipating more challenging U.S. data, including the ISM measures of manufacturing and services, with the latter being especially important following January’s sharp surge in activity. Additionally, at least six Federal Reserve policymakers are scheduled to speak this week and offer their commentary on the possibility of further rate hikes. Meanwhile, China’s manufacturing surveys and the National People’s Congress, which starts at the weekend and will introduce new economic policy targets and policies, as well as a reshuffling of government officials, are closely watched.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped by 1.0%, following a 2.6% decline last week. Japan’s Nikkei declined 0.2%, and South Korea fell by 1.2%. China’s blue chips fell 0.2%, while China Renaissance Holdings rebounded after the mainland boutique bank revealed that its missing chairman is cooperating with Chinese authorities in an investigation. EUROSTOXX 50 futures added 0.1%, and FTSE futures rose 0.4%.

S&P 500 futures strengthened by 0.1%, while Nasdaq futures rose 0.2%. Strong data on spending and core prices caused the S&P 500 to break support at 4,000 on Friday and retrace 61.2% of this year’s rally. Fed futures now suggest rates peaking around 5.42%, indicating at least three more hikes from the current 4.50% to 4.75% range and some possibility of 50 basis points in March.

Markets have also nudged up the estimated rate tops for various other central banks, including the European Central Bank and the Bank of England. Bruce Kasman, head of economic research at JPMorgan, has added another quarter-point hike to the ECB outlook, taking it to 100 basis points. Germany’s 2-year bond yield surpassed 3.0% on Friday for the first time since 2008.

“The risk is clearly skewed toward greater action from the Fed,” says Kasman. “Demand is proving resilient in the face of tightening, and lingering damage to supply from the pandemic is limiting the moderation in inflation. The transmission of the rapid shift in policy still underway also raises the risk of a recession not intended by central banks.”

Higher rates and yields stretch valuations for equities, especially those with high PE ratios and low dividend payouts, including much of the tech sector. Shares in the United States trade at a price to earnings multiples of around 17.5 times forward earnings, compared to 12 times for non-U.S. shares.

Ten-year Treasury bonds also yield more than twice the estimated dividend yield of the S&P 500 Index and have much less risk. With the earnings season nearly over, about 69% of earnings have surprised on the upside, compared to a historical average of 76%, and annual earnings growth is around -2%.

The upward shift in Fed expectations has been a boon for the U.S. dollar, which climbed 1.3% on a basket of currencies last week to last stand at 105.220. The euro was pinned at $1.0546, after touching a seven-week low of $1.0536 on Friday. The dollar scaled a nine-week top on the yen, standing at 136.27, supported in part by dovish comments from top policy makers at the Bank of Japan.

The rise in the dollar and yields has been a burden for gold, which shed 1.7% last week and was last lying

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