Asia stocks tumble after US Fed's rate warning; STI down 1%

Japan's Nikkei index sank 2.37 per cent while Australia's S&P/ASX 200 index lost 1.86 per cent. PHOTO: AFP

SINGAPORE (BLOOMBERG, REUTERS) - Asian stocks slumped on Monday (Aug 29), with the regional benchmark approaching a two-year low reached in mid-July, as investors fled risk assets after the Federal Reserve signalled it will keep raising interest rates to rein in inflation.

The MSCI Asia-Pacific Index slid as much as 2.3 per cent, with technology and industrials the worst-performing sectors.

Japan’s Nikkei index sank 2.76 per cent, while Australia’s S&P/ASX 200 index lost 2.15 per cent and South Korea’s Kospi dropped 2.14 per cent.

Singapore’s Straits Times Index was down 1 per cent at 10.57am local time.

Hong Kong’s Hang Seng Index slumped 0.67 per cent, while Shanghai Composite was down 0.31 per cent.

The hawkish message was not what Wall Street wanted to hear and S&P 500 futures were down a further 1.1 per cent, having shed almost 3.4 per cent last Friday. Nasdaq futures lost 1.5 per cent, with tech stocks pressured by the outlook for slower economic growth.

Most of the world’s top central bankers, including Fed chair Jerome Powell, delivered a stern message on the need to curb inflation as they gathered at the Jackson Hole symposium last week. Rates are heading higher and will stay there “for some time”, Mr Powell said in a speech on Friday, dashing hopes for investors betting the Fed will shift to rate cuts next year as growth slows.

“Key to whether Asia will suffer more substantially will depend crucially on the direction of the dollar,” said Mr Gary Dugan, chief executive at the Global CIO Office in Singapore. “Our quant model is giving a near-term sell signal on the equity markets.”

Monday’s loss extends the Asian stock benchmark’s year-to-date decline to more than 18 per cent, trailing European and United States peers. The region’s equities have faced selling pressure this year amid rising global interest rates and the impact of China’s Covid-19 lockdowns.

Mr Powell’s tough-love message was driven home by European Central Bank (ECB) board member Isabel Schnabel who warned over the weekend that central banks must now act forcefully to combat inflation, even if that drags their economies into recession.

That triggered a sharp fall in Euribor futures as markets priced in the risk the ECB could hike by 75 basis points next month.

Futures are now pricing in around a 64 per cent chance that the Fed will hike by 75 basis points in September, and see rates peaking in the 3.75 per cent to 4 per cent range.

Much might depend on what the August payrolls figures show this Friday when analysts are looking for a moderate rise of 285,000 following July’s blockbuster 528,000 gain.

Sectors to watch

Major Asian technology stocks slid after Mr Powell gave a clear message at Jackson Hole that interest rates will likely remain high for some time.

South Korean defence companies defied a broader sell-off in Asia after Hyundai Rotem and Hanwha Defence Systems signed a US$5.76 billion (S$8 billion) agreement to supply tanks and artillery to Poland.

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