(Bloomberg) — Asian equities were set to drop Thursday after a weak Treasury auction dealt a fresh blow to sentiment on Wall Street.
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Futures contracts for Japan, Australia and Hong Kong fell, while a gauge of US-listed Chinese shares slipped 1.5%. Both the S&P 500 and the tech-heavy Nasdaq 100 declined, unwinding early gains that were initially helped along by dovish signals from the Bank of Japan.
The central bank on Wednesday indicated policymakers wouldn’t raise interest rates during bouts of market volatility, leading to further weakness in the yen. The Japanese currency was steady Thursday after falling 1.6% against the dollar Wednesday.
Treasuries broadly sold off across the curve on Wednesday, weighed down by lackluster demand for a 10-year auction. The 10-year yield rose five basis points to 3.94%. Treasuries also came under pressure as 17 blue-chip companies offered $31.8 billion of debt, the highest amount of US investment-grade issuance this year.
The auction result is “consistent with our view that we’re due for a continued correction higher in yield in the near-term,” said Zachary Griffiths, head of US investment grade and macro strategy at CreditSights. “The repricing following what was really just a moderately weak payrolls report seems way overdone.”
Following a gain of almost 2% earlier in the session, the S&P 500 closed 0.8% lower. Nvidia Corp. led losses in megacaps. Super Micro Computer Inc. tumbled 20% on disappointing earnings. In late trading, Warner Bros. Discovery Inc., the parent of CNN and TNT, plunged after posting a charge of $9.1 billion as it wrote down the value of its traditional TV networks.
Markets have been in a tailspin since last week’s economic data fueled worries that the Federal Reserve’s decision to hold rates at a two-decade high is risking a deeper economic slowdown.
JPMorgan economists now see a 35% chance that the US economy tips into a recession by the end of this year, up from 25% as of the start of last month.
“Stocks remain vulnerable,” said Fawad Razaqzada at City Index and Forex.com. “More evidence of a bottom is needed to excite the bulls again. Overall, sentiment remained cagey. Not many people were confident to buy this latest dip, especially with US CPI looming next week.”
The sharp decline for the yen on Wednesday rippled across currency markets. The Mexican peso was one beneficiary, rising 1.5% against the dollar. The Indonesian rupiah and Brazilian real also gained against the dollar Wednesday.
Oil climbed as investors remained on edge over the possibility of a retaliatory strike from Iran on Israel.
Carry Trade
The global unwinding of the carry trade triggered by the BOJ surprisingly more hawkish stance last week, that in turn strengthened the yen markedly, has eased considerably, according to Quincy Krosby at LPL Financial.
“Markets globally have felt a sigh of relief as the velocity of the unwinding eases, but the yen’s relationship to the dollar is also a key component of the carry trade calculus,” she noted. “A softer dollar, driven by the markets perception that the Fed will soon initiate an easing cycle, should help support a stronger yen — a negative for the trade.”
Earlier gains in stocks were fueled by Japan’s reassurance on the heels of massive swings in the country’s stock prices over the past week. The moves were compounded by the view the Fed would cut rates more aggressively, prompting traders to rapidly unwind once-popular yen-funded carry trades — including crowded positions in US tech stocks.
Key events this week:
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Germany industrial production, Thursday
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US initial jobless claims, Thursday
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Fed’s Thomas Barkin speaks, Thursday
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China PPI, CPI, Friday
Some of the main moves in markets:
Stocks
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S&P 500 futures fell 0.4% as of 7:14 a.m. Tokyo time
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Hang Seng futures fell 0.9%
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S&P/ASX 200 futures fell 0.4%
Currencies
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The Bloomberg Dollar Spot Index rose 0.1%
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The euro was little changed at $1.0924
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The Japanese yen rose 0.2% to 146.40 per dollar
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The offshore yuan was little changed at 7.1713 per dollar
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The Australian dollar was little changed at $0.6515
Cryptocurrencies
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Bitcoin fell 0.1% to $55,084.54
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Ether fell 0.2% to $2,345.91
Commodities
This story was produced with the assistance of Bloomberg Automation.
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