Asian Stocks Mixed With Focus on Fed, China Covid: Markets Wrap

In Business
2022-12-06 03:52:50Z
By Bloomberg

(Bloomberg) -- Asian stocks were mixed as investors weighed unexpectedly strong US services data and China's accelerated moves toward exiting its Covid-Zero policy.

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Equities fell in Australia, reversed course to rise in Japan and fluctuated in mainland China and Hong Kong. US futures made small gains following S&P 500's third day of declines.

Treasury yields were steady in Asian trading after surging Monday as the services reading bolstered the case for the Federal Reserve to deliver higher interest rates. The dollar was little changed.

Australia's central bank raised its key interest rate by 25 basis points as expected while giving itself flexibility for future decisions. The yield on Australia's three-year government bond rose and the Australian dollar extended its advance slightly.

The yen erased gains after the Bank of Japan reiterated its dovish policy stance. 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%.

"We would argue that the potential for a higher terminal rate remains," Goldman Sachs Group Inc. strategists, including Cecilia Mariotti, wrote in a note. That's even after Fed Chair Jerome Powell last week indicated the likelihood of a step down in the size of its rate hikes at this month's policy meeting.

"Our economists expect Fed Funds rates to peak at around 5-5.25%; a stronger US economy might translate into further pressure on risky assets near-term due to upward pressure on rates," they wrote.

Meanwhile, Beijing announced it will scrap Covid testing requirements for most public venues in what is seen as an accelerated move toward the exit of Covid zero policy. But the possibility of new tariffs on Chinese steel and aluminum by the US and European Union may weigh on sentiment.

Oil was up for the first time in three days on optimism that China's reopening will buoy demand. Gold climbed.

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