As investors expect the ECB’s decision, Asian stocks are falling and the dollar is strengthening

As investors expect the ECB's decision, Asian stocks are falling and the dollar is strengthening

On Thursday, Asian markets sank, US bond yields rose, and the dollar surged to a two-decade high versus the yen, as investors worried about the impact of interest rate hikes ahead of a European Central Bank meeting later in the day. The cautious tone seen in Asian markets was set to continue in European markets, with stock futures pointing to a weaker open across the board.

“It’s classic pre-central-bank-meeting price action. To speculate now on anything other than an hourly timeframe, or an intraday timeframe, doesn’t make a whole lot of sense at the moment,” said Matt Simpson, senior market analyst at City Index in Sydney. “It’s the most exciting meeting since (Christine Lagarde) has been at the helm, since Draghi was here – ‘whatever it takes.”

Euro Stoxx 50 futures, DAX futures in Germany, and FTSE futures in the United Kingdom were all down 0.4 percent to 0.5 percent. The ECB meeting, which is expected to end the bank’s Asset Purchase Program and signal rate hikes to battle growing inflation, was surprisingly quiet. Many investors were staying away from the market.

Adding to concern over European inflation, data showed the eurozone economy grew much faster in the first quarter than the previous three months, despite the war in Ukraine. As investors guess at the size and pace of ECB tightening, they are also awaiting U.S. consumer price data on Friday that the White House has said it expects to be “elevated”. Economists expect annual inflation to be 8.3%, according to a Reuters poll.

Hong Kong’s Hang Seng turned around from small gains to fall 0.75% and Chinese A-shares fell 1% as parts of Shanghai began imposing new COVID-19 restrictions. Hopes for an easing of curbs contributed to a recovery in Chinese shares in recent weeks, and the relaxations gave a boost to the country’s exports in May.

While Asian share markets have risen around 9% from nearly two-year lows touched last month, investors remain worried that central bank policy tightening to control inflation could spark an economic slowdown. MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.65% in afternoon trade, with Australian shares down 1.22% and Seoul’s KOSPI 0.49% lower.

In Japan, the Nikkei stock index added 0.04%. Overnight, the Dow Jones Industrial Average fell 0.81%, the S&P 500 lost 1.08% and the Nasdaq Composite dropped 0.73%. “Over the last two weeks, trading has been in a very narrow range and also based on very low volumes,” analysts at ING said in a note.

“Previous instances of this range trading on low volumes have usually preceded a sharp down-shift,” they cautioned, adding that the ECB meeting and Friday’s U.S. price data were likely “catalysts for a more bearish outlook”. The wait for U.S. price data also weighed on U.S. Treasuries, with yields rising after a weak auction of 10-year notes on Wednesday.

The U.S. 10-year yield ticked up on Thursday to 3.0344% from a U.S. close of 3.029% on Wednesday and the two-year yield climbed to 2.7887% compared with a U.S. close of 2.774%. Rising yields supported the dollar, particularly against the yen, which dropped to a 20-year low of 134.56 before regaining some ground. The Japanese currency has been weighed down by a widening policy divergence, with the Bank of Japan remaining one of the few global central banks to maintain a dovish stance. The global dollar index was holding steady at 102.51, and the euro was flat ahead of the ECB meeting at $1.0719. Crude oil prices extended gains, rising to their highest levels in three months on expectations for strong U.S. demand and a recovery in China as COVID-19 curbs are eased. Global benchmark Brent crude was last at $123.94 per barrel, up 0.29% on the day. U.S. crude added 0.19% to $122.34. Gold, sensitive to rate hikes but seen as an inflation edge, was weaker. Spot gold lost 0.08% to $1,851.80 per ounce.

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