Asia Pacific markets face turbulence today after heightened concerns about inflation sank both bonds and stocks in US trading. Markets continued to chew over the US Federal Reserve’s accommodative stance, and seemed to conclude that leniency on inflation this year means tighter monetary policy down the track.
US 30 year bonds rose to trade at a yield of 2.5%, the highest level in 18 months. Shorter dated bonds remained steady, suggesting traders’ fears about inflation are longer term. However a lift in the US dollar following the previous night’s fall points to a deterioration in sentiment after the initial positive response to the Fed’s messages. Investors with longer memories may recall that the inflation genie is very difficult to contain once it is out of the bottle.
The combination of weaker sentiment and growing concerns that new European lockdowns will weigh on demand saw oil markets trounced. Major light crude grades fell 7% to 7.5%. Pressure flowed into base metals markets, but the falls were less dramatic. Gold rose despite the stronger US dollar in another sign of investors seeking safe haven.
Futures markets indicate opening share market declines of 0.5% to 1.0% today. The risks around important price reads may prove one-sided, as weaker than forecast Japanese CPI (-0.4%) this morning and German PPI (+0.8%) tonight will likely be written off as historical, but higher than expected numbers could increase inflation fears and accelerate selling.