Asia markets mixed after Fed signals higher rates for longer

Asia markets

Asia-Pacific markets traded mixed on Wednesday after the U.S. Federal Reserve held its benchmark policy rate, but said it will raise interest rates one more time this year, according to the central bank’s projections. The Fed also projected two rate cuts in 2024, which is two fewer than its forecast in June. That would put the funds rate around 5.1%.

The Fed’s move signaled that it expects the U.S. economy to recover from the impact of the coronavirus pandemic, but also that it is prepared to tighten monetary policy to contain inflationary pressures. The Fed said it will continue to buy $120 billion worth of bonds each month until “substantial further progress” has been made toward its goals of maximum employment and price stability.

The Fed’s decision and projections weighed on investor sentiment in Asia, as higher U.S. interest rates could reduce the appeal of riskier assets and increase the cost of borrowing for emerging markets. Some analysts also warned that the Fed’s hawkish stance could trigger market volatility and currency fluctuations.

Asia markets

Asia markets react to Fed’s announcement

In Australia, the S&P/ASX 200 fell 0.37% and closed at 7,038.2, its lowest level since July 10. The index was dragged down by losses in the energy, materials and financial sectors, as well as a weaker Australian dollar. The Aussie dollar dropped to 0.7246 against the U.S. dollar, after hitting a one-month high of 0.7346 on Tuesday.

Japan’s Nikkei 225 also slipped 0.52% and closed at 32,402.41, as the Bank of Japan started its two-day monetary policy meeting. The BOJ is widely expected to keep its policy settings unchanged, but may revise down its economic outlook due to the impact of the Covid-19 state of emergency. The Japanese yen strengthened to 110.93 per U.S. dollar, after reaching a one-week low of 111.65 on Tuesday.

South Korea’s Kospi was the best performer in the region, rising 0.26% and finishing at 2,519.13, recovering from a one-month low on Tuesday. The index was boosted by gains in the technology and consumer sectors, as well as a rebound in the South Korean won. The won appreciated to 1,175.50 per U.S. dollar, after hitting a four-month low of 1,183.50 on Tuesday.

Hong Kong’s Hang Seng index was up 0.21%, while mainland Chinese markets were also slightly higher, with the CSI 300 adding 0.12%. The markets shrugged off the Fed’s announcement, as well as the latest data from China that showed industrial profits grew at a slower pace in August. The Chinese yuan weakened to 6.4725 per U.S. dollar, after hitting a three-week high of 6.4490 on Tuesday.

U.S. stocks sell off after Fed’s statement

Overnight in the U.S., all three major indexes lost ground as investors digested the Fed’s moves, with the Nasdaq Composite leading losses and down 1.5%, dragged by names like Microsoft, Nvidia and Google-parent Alphabet. The S&P 500 dropped 0.94%, closing below 4,300 for the first time since June 9, while the Dow Jones Industrial Average lost 0.22%, closing below its 200-day moving average for the first time since May.

The U.S. Treasury yields and the dollar rose in response to the Fed’s signal of higher rates for longer. The yield on the 10-year Treasury note climbed to 1.54%, its highest level since June, while the yield on the 30-year Treasury bond rose to 2.09%, its highest level since July. The dollar index, which measures the greenback against a basket of six major currencies, jumped to 93.53, its highest level since August.

The Fed’s announcement also had an impact on the oil and gold markets. Oil prices fell as the stronger dollar made the commodity more expensive for holders of other currencies. Brent crude, the global benchmark, dropped 0.8% to $75.29 a barrel, while West Texas Intermediate, the U.S. benchmark, fell 0.9% to $71.91 a barrel. Gold prices also declined as the higher yields and dollar reduced the appeal of the safe-haven metal. Spot gold fell 0.7% to $1,742.80 an ounce, while U.S. gold futures settled 0.6% lower at $1,741.60 an ounce.

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