Asia Stocks Eye Drop as Fed’s Pivot Saps Reflation: Markets Wrap

(Bloomberg) -- Asian stocks look set to drop Monday after traders soured on the reflation trade in the wake of a hawkish pivot by the Federal Reserve. The dollar was steady against major peers in early trading.

Equity futures pointed lower in Japan, Australia and Hong Kong. U.S. contracts fluctuated after the S&P 500 slid Friday, when commodities such as copper dropped and the dollar touched a two-month high on the prospect of less accommodative U.S. monetary policy.

The flattening of the Treasury yield curve was another illustration of the retreat in reflation bets, a trade that had dominated markets this year. The 10-year yield declined to 1.44%, and short-maturity yields surged after Fed official James Bullard said inflation risks may warrant higher interest rates next year, an earlier liftoff than penciled in by many of his colleagues.

Gold stabilized after slumping last week. Oil held above $71 as talks between world powers and Iran dragged on, potentially delaying the return of the latter’s energy exports.

In a light week for economic data, traders will be paying close attention to appearances by Fed policy makers, including Chair Jerome Powell, for any guidance on the winding back of stimulus. In his comments, Bullard also said that the central bank has started discussing tapering asset purchases.

“The shift towards tapering and a pull forward in first rate hikes may cause bouts of nervousness in markets with shares vulnerable to a decent correction,” Shane Oliver, head of investment strategy at AMP Capital, wrote in a note. “But note that tapering is not monetary tightening (it’s just slower easing) and rate hikes are still a fair way off in most developed countries.”

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Here are some events to watch this week:

• St. Louis Fed President James Bullard, Dallas Fed President Robert Kaplan and New York Fed President John Williams are among Fed speaker throughout the week
• European Central Bank President Christine Lagarde addresses the European Parliament Monday
• Fed Chair Jerome Powell testifies at a House Subcommittee hearing on the Fed’s pandemic emergency lending and its asset purchase programs Tuesday
• Bank of England interest rate decision Thursday

These are some of the main moves in financial markets:

Stocks

• S&P 500 futures slipped 0.1% as of 7:40 a.m. in Tokyo. The gauge fell 1.3% Friday
• Nasdaq 100 futures edged up 0.1%. The index fell 0.8%
• Nikkei 225 futures fell 1.7%
• Australia’s S&P/ASX 200 Index futures dropped 1.5%
• Hang Seng Index futures fell 0.8% earlier

Currencies

• The yen was little changed at 110.20 per dollar
• The offshore yuan traded at 6.4586 per dollar
• The Bloomberg Dollar Spot Index was steady after rising 0.4% Friday
• The euro was at $1.1868

Bonds

• The yield on 10-year Treasuries declined about seven basis points to 1.44% Friday

Commodities

• West Texas Intermediate crude rose 0.2% to $71.75 a barrel
• Gold rose 0.3% to $1,769.22 an ounce

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