Japan’s marquee index, the Nikkei 225, crumbled in early trade, falling as much as 3%. Another Tokyo-based index, the TOPIX, fell close to 2%. South Korea’s AI-tech-driven KOSPI was no different, falling 2.50% on Friday.
Earlier, the S&P 500 Index fell by 0.5%. Brent crude oil rose by 0.4% on Friday, reaching nearly $110 per barrel during US trading, which in turn pushed Treasury yields to their highest levels in several years. As a result of this, the MSCI Asia Pacific Index decreased by 1.4%
The Bond Problem
Bonds faced additional pressure as the Treasury repurchased less than what investors had anticipated. Furthermore, a US producer-price report that exceeded expectations led traders to increase their bets on a Federal Reserve rate hike scheduled for next week.
Asian government bonds mirrored the downward trend of Treasuries. Australia’s three-year yield surged by as much as 20 basis points to 5.05%, marking its highest point since 2011, while New Zealand’s two-year yield also rose by over 20 basis points.
On Thursday, Treasury yields increased across the board, with the 10-year rate remaining just below 5% during early trading on Friday, close to its highest point since 2023. The decline intensified after the US government acquired fewer 10-to-20-year securities than anticipated during Treasury Secretary Scott Bessent’s initial expanded buyback operation.
The upcoming US consumer-price-index report on Friday will serve as a crucial indicator for risk sentiment, as investors will be keen to determine whether rising energy prices are influencing broader inflationary pressures.
A lower-than-expected reading could alleviate the upward trend in bond yields and rate-hike expectations that have been pressuring equities, whereas another unexpected increase could prolong the selloff.According to government data, the US producer price index experienced a rise of 0.4% in August compared to the previous month, marking the largest increase since May. Swaps are currently indicating approximately a 70% probability of a Federal Reserve rate hike next week, with a complete expectation of a move by October.
European Central Bank President Christine Lagarde has heightened concerns regarding stricter global monetary policy, stating that inflation in the region is expected to remain significantly above target until 2027.
The surge in oil prices has introduced further challenges for central banks, as the ongoing conflict in the Strait of Hormuz poses a risk of sustaining elevated energy prices. An uptick in attacks on shipping within this vital waterway has resulted in increased costs for oil, natural gas, and diesel, raising worries that these energy expenses will contribute to inflation.
Also Read: Brent Crude prices cross $108 a barrel – Here’s what is contributing to the surge
