Asian stocks fall as data bolster higher Fed peak

Asian stocks followed US shares lower after unexpectedly strong services data bolstered the case for the Federal Reserve to deliver higher interest rates. 

Equities fell in Australia and South Korea and fluctuated in Japan. Futures for Hong Kong slid following a third day of declines in the S&P 500, which dropped 1.8%. 

Treasury yields were little changed in Asian trading and the dollar steadied after rallying Monday as the US economic outlook fueled bets the Fed will keep policy tight to tame stubborn inflation.

Short-maturity Australian bond yields edged higher after the jump in their US counterparts and ahead of a central bank decision later Tuesday. The Reserve Bank of Australia is forecast to raise its key rate by 25 basis points, half the size of the move expected later this month from the Fed.

The Australian dollar trimmed its overnight losses, the yen rose slightly and the offshore yuan remained below 7 to the greenback.

Swaps showed an increase in expectations for where the Fed terminal rate will be, with the market indicating a peak above 5% in the middle of 2023. The current benchmark sits in a range between 3.75% and 4%. 

Morgan Stanley’s Michael Wilson, one of the US stock market’s most-vocal skeptics, says investors are better off booking profits. “We are now sellers again,” the strategist and his colleagues wrote.

Still, Ben Emons, senior portfolio manager at Newedge Wealth, said the Fed will be “going on the track now with slower hikes.”

“That will be really communicated, I think, in the December press conference,” he said on Bloomberg Television. 

Meanwhile, the possibility of new tariffs on Chinese steel and aluminum by the US and European Union may weigh on sentiment when equity trading opens in China.

Elsewhere, a majority of 291 respondents to the latest MLIV Pulse survey said leveraged loans would be the canary in the coal mine to indicate that corporate credit quality is getting worse.

About 28% of survey respondents expect defaults to jump significantly if US rates peak at or below 5%, which is about where the market bets the Fed will stop hiking. Another 63% see defaults surging if rates peak above 5%.

Key events this week:

• US trade, Tuesday
• EIA crude oil inventory report, Wednesday
• Euro zone GDP, Wednesday
• US MBA mortgage applications, Wednesday
• ECB President Christine Lagarde speaks, Thursday
• US initial jobless claims, Thursday
• US PPI, wholesale inventories, University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• S&P 500 futures rose 0.2% as of 9:30 a.m. Tokyo time. S&P 500 fell 1.8%
• Nasdaq 100 futures rose 0.2%. The Nasdaq 100 fell 1.7%
• Japan’s Topix index was little changed
• South Korea’s Kospi index fell 0.3%
• Australia’s S&P/ASX 200 Index fell 0.2%
• Hong Kong’s Hang Seng futures fell 2.1%

Currencies

• The Bloomberg Dollar Spot Index fell 0.2%
• The euro rose 0.2% to $1.0509
• The Japanese yen rose 0.3% to 136.35 per dollar
• The offshore yuan rose 0.2% to 6.9642 per dollar
• The Australian dollar rose 0.2% to $0.6713

Cryptocurrencies

• Bitcoin rose 0.2% to $17,007.45
• Ether rose 0.3% to $1,263.22

Bonds

• The yield on 10-year Treasuries was little changed at 3.57%
• Australia’s 10-year yield declined one basis point to 3.35%

Commodities

• West Texas Intermediate crude rose 0.6% to $77.43 a barrel
• Spot gold rose 0.1% to $1,770.56 an ounce