Asia markets spooked as Fed chief signals rate hikes

In Asia, key indices in Tokyo, Sydney, Hong Kong and Seoul fell by around 2.5 per cent, after sharp overnight falls on Wall Street.

Ven Sreenivasan

Ven Sreenivasan

The Straits Times


Japan's Nikkei 225 closed at a new year low at 26,170 points on Jan 27, 2022, one of several key Asian indices to register a fall. PHOTO: AFP

January 28, 2022

SINGAPORE – Asian markets tumbled on Thursday (Jan 27) as investors rushed for the door following Federal Reserve chairman Jerome Powell’s hawkish comments on interest rates and concerns of an impending Russian invasion of Ukraine.

In Asia, key indices in Tokyo, Sydney, Hong Kong and Seoul fell by around 2.5 per cent in Thursday’s session. This happened after sharp overnight falls on Wall Street.

South Korea’s benchmark Kospi, one of Asia’s worst performers this year amid sharp declines by semiconductor stocks, entered a bear market as it plunged 3.5 per cent to 2,615 points by late afternoon.

Japan’s Nikkei 225 gave up 3.1 per cent to a new year low at 26,170 points, while Sydney’s ASX200 slipped 1.8 per cent to 6,838 points – its lowest level since March last year. Hong Kong’s Hang Seng slid 2 per cent to its lowest level since the third quarter of 2020 as it closed at 23,807 points.

Shanghai’s Composite Index – already shaken by its troubled property sector – gave up another 1.8 per cent to 3,394 points.

Singapore’s Straits Times Index was relatively unscathed, closing just 0.35 per cent or 11.54 points down at 3,260.03.

All this came on the heels of Wednesday’s Federal Open Market Committee (FOMC) meeting, where Mr Powell gave his clearest indication yet that he would hike rates in the face of inflation pushing past 7 per cent.

Citing strong employment numbers, he said there was “quite a bit of room to raise interest rates without threatening the labour market”.

There is an expectation of a 25-basis point hike in March followed by at least three more over the coming 12 months – the first time the Fed would have hiked rates since December 2018.

“There’s a risk that the high inflation we’re seeing will be prolonged; there’s a risk that it will move even higher,” Mr Powell said. “We have to be in a position with our monetary policy to address all of those plausible outcomes.”

Wall Street, which was into the midday trading as Mr Powell spoke, immediately reacted with the three key indices pulling back sharply during the afternoon session.

At the close of Asian trading on Thursday, Dow futures were down about 0.9 per cent or 300 points. But at the opening (Thursday night Singapore time), the Dow, S&P500 and Nasdaq indices were up sharply on expectation of a strong pickup in GDP numbers and improving corporate results.

It remains to be seen if this will rub off on Asia on Friday.

Mr Vasu Menon, executive director for investment strategy at OCBC Wealth Management, said markets were spooked by the fact that the Fed has pivoted on three fronts: It has doubled the pace of tapering; plans to start hiking rates after tapering ends in March; and plans to start reducing its massive balance sheet soon after.

And all of this is possibly happening this year.

“In the past, there was quite a long gap between tapering, starting rate hikes and starting quantitative tightening,” he noted.

“But this time around, markets are concerned that the central bank’s hand may be forced by rising inflation. Get ready for a bumpy ride in 2022.

“We are of the view that the Fed will start gradual 25-basis points rate rises from March and continue to hike in June, September and December. We also expect the Fed to start shrinking its balance sheet from May.”

Still, not everyone was surprised by Mr Powell’s strong language.

“The market was disappointed but I wasn’t,” said Mr Kelvin Tay, chief investment officer for Asia-Pacific at UBS. “I’ve always felt that with the Fed so far behind the curve, the language had to be strong to take some froth out of the equity and housing markets.

“In fact, Mr Powell’s press conference was particularly revealing on his thoughts about inflation and the timing of the rate hike. Pointedly, he said that the FOMC would move ‘steadily’ away from its current policy stance, avoiding the term ‘gradual’ used in the last cycle.”

Meanwhile, Russia’s build-up of more than 100,000 troops on Ukraine’s border is causing market consternation despite Moscow’s reassurance that it was not likely to attack its neighbour.

All in all, the consensus is that the first quarter is likely to be a tumultuous one for financial markets.

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