Asian share rally sputters as Chinese stocks pull back and US yields rise

Sydney — A rally in Asian shares sputtered on Thursday, pressured by a pullback in Chinese stocks and higher US yields amid fears that global central banks would keep raising interest rates to combat sticky inflation.

MSCI’s broadest index of Asia-Pacific shares outside Japan lost 0.3%, reversing some of the 2.1% gain in the previous session — the index’s best day in two months. Japan’s Nikkei, on the other hand, eased 0.2%.

Hong Kong’s Hang Seng index retreated 1.0%, after registering the biggest daily gain of 4.2% in nearly three months the previous day, buoyed by unexpectedly robust readings from Chinese purchasing managers’ index (PMI) surveys.

Investors’ enthusiasm has faded somewhat over China’s economic reopening after Beijing dismantled its strict Covid-19 controls in December, as analysts look for more evidence to gauge the pace of economic recovery.

US futures erased earlier gains, with S&P 500 stock futures falling 0.5% and Nasdaq futures down 0.7%.

Tesla shares slumped 5.5% in after-hour trading, after the Tesla Investor Day failed to excite investors. The company will cut vehicle assembly costs by half in future generations of cars, engineers told investors.

“Financial markets are caught between the two narratives of a softer landing, helped by China’s reopening, and sticky inflation keeping policy rates higher for longer,” said Chris Turner, global head of markets at ING.

“That will probably keep bond markets on the back foot and FX markets volatile in ranges.”

Higher interest rates for longer

Overnight, both bonds and shares took a battering, as inflation indicators from Germany and the US reinforced expectations that interest rates would go higher and stay there for longer.

Data overnight showed no let-up in stubborn price pressures in Germany, after both Spain and France posted unexpected inflation rises on Tuesday. Germany’s two-year government bond yield rose to its highest since October 2008.

In the US, manufacturing activity contracted for a fourth straight month in February, but a gauge of prices for raw materials increased last month, stoking concerns that inflation would remain stubborn.

“The PMI manufacturing data provides a mixed message for global risk appetite, with improving growth trends positive, but lower output prices stalling out,” said Alan Ruskin, macro strategist at Deutsche Bank.

“In general, developed markets tend to have a worse balance than emerging markets, in so much as growth is weaker and inflation more sticky.”

On Thursday, the benchmark 10-year treasury yields hit a fresh four-month high of 4.0160%, after hitting 4% overnight. The two-year yields also advanced to 4.9080%, a fresh 15-year high.

Investors still mostly foresee the US Federal Reserve raising rates by 25 basis points (bps) at its next meeting later this month, but expectations of a larger 50 bps hike have increased. The probability that the Fed’s policy rate, now set in the 4.5% to 4.75% range, could peak above the 5.5% range stood at 53%, compared with 41.5% on February 28, according to CME Fed tool.