Morning Bid Avoiding US curve ball

Morning Bid Avoiding US curve ball

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Asian Markets Brace for Volatility as U.S. Yield Curve Takes Center Stage

By Jamie McGeever, Financial Markets Columnist

Investors in the Asian market are gearing up for what seems to be the first proper “risk off” week since the U.S. regional banking shock earlier this year. The rise in volatility and heavy selling witnessed this week can be attributed to various factors such as Japan’s surprise policy shift and Fitch’s unexpected U.S. credit rating downgrade. However, one culprit seems to be emerging above all others – the U.S. yield curve.

The long end of the U.S. Treasury curve is experiencing a significant decline, resulting in a surge in long-dated yields and causing the curve to steepen. These rapid movements are unsettling investors, especially as many stock markets are currently at or near historical highs.

“But right now, it’s all about the U.S. yield curve.”

The steepening of the 2s/10s curve this week is one of the most significant since April last year, surpassing anything seen during the pandemic. The 10-year and 30-year yields have reached their highest levels since November, comfortably sitting above 4.0%. The latter is on track for its most substantial weekly rise this year.

This bearish sentiment is reflected in the performance of key indices. The S&P 500 is enduring its worst week since March, down 1.7% and experiencing its third week of decline in the past twelve. Similarly, the MSCI World index is also down over 2% for the week.

Global currency markets and S&P 500 equity volatility have reached their highest levels in two months. Implied volatility in dollar/yen trading has seen its most significant weekly rise since March, indicating increased uncertainty and market tension.

While Asian stocks ex-Japan have underperformed this year, with the MSCI Asia ex-Japan index down 2.5%, the current week’s losses wipe out all the previous week’s gains. This downward trend suggests that this could be the worst week in six weeks for the Asian markets.

Key Developments to Influence Friday’s Market Direction

Friday’s Asian economic data and corporate events calendar is relatively light, with only the release of Philippines’ inflation and Singapore’s retail sales. As such, regional markets will be heavily influenced by global risk sentiment.

However, after-the-bell earnings on Thursday from tech giants Apple and Amazon have the potential to soothe investors’ nerves prior to the release of the latest U.S. employment report. Both companies posted solid financial results and optimistic outlooks, instilling hope in the market.

Ultimately, the focus remains on the U.S. yield curve and its impact on global markets. As investors brace for heightened volatility, the outcome of key events and economic indicators could provide further direction for market participants. These include:

  • Philippines CPI inflation (July)
  • Singapore retail sales (June)
  • U.S. non-farm payrolls, unemployment (July)

In this uncertain environment, market participants will need to closely monitor developments and navigate through these turbulent times with caution and resilience.

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