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Asian stock markets fell on Tuesday, with financial shares in Tokyo leading losses as fears of a US banking crisis sent investors fleeing the economy and slashed the outlook for interest rates even ahead of US inflation figures later in the day.
Japan’s Nikkei fell by 2%. The bank index in Tokyo fell by more than 5% and is thus on track for the biggest decline in almost six months. Bank shares in Singapore and Australia fell. Hong Kong shares in HSBC and Standard Chartered fell by more than 5%.
Markets remained jittery after last week’s collapse of Silicon Valley banks and the collapse of New York’s Signature Bank over the weekend, even after the U.S. government took steps to shore up systemic confidence.
Shares in U.S. regional banks suffered a sharp sell-off overnight as traders shied away from bets on U.S. interest rate hikes, citing the volatility as causing political caution. S&P 500 futures steadied in Asian trade and were last up 0.6%.
Two-year Treasuries were flat after their biggest gain since 1987, and U.S. interest rate futures edged lower after rising sharply in New York, as markets priced in the possibility of a 50 basis point Fed hike next week.
“Banking has started (and) interbank markets have become nervous,” said Damien Boey, chief equity adviser at investment bank Barrenjoey in Sydney.
“Austerity measures arguably should have stopped this dynamic, but Main Street has been watching news and queuing — not financial plumbing,” he said. “Fear has started to feed on itself and greater uncertainty has single-handedly triggered its own leverage and risk compounding.”
Overnight, the VIX volatility index, dubbed Wall Street’s “fear gauge,” edged higher and other indicators of market stress showed early signs of strain. The S&P banking index fell 7%, the biggest one-day decline since June 2020.
JAPAN MORTGAGE SHUT OFF
On the Asian day, stocks tried to stabilize around midday and had risen from mid-morning lows. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.2%.
Meanwhile, bonds in Australia and Korea enjoyed their best gains in a decade on a stark outlook.
Japanese yields were dipping – and dragging on the banks – as traders stopped betting that Japan would soon abandon its ultra-easy policy.
Refinitiv Data showed the yield on Japan’s 10-year government bond retreated from a peak of 50 basis points and fell more than 27 basis points in three days, the biggest such move in more than two decades.
On the stock market, Resona Holdings led the losses with a 9% drop, followed by life insurer T&D, down 8%.
“Bank shares had rallied (on) the perception that monetary policy might normalize a bit,” said Jamie Halse, who manages a Japan-focused fund at Platinum Asset Management in Sydney.
“We’ve seen the yield on the 10-year (Treasury) come in quite a bit … now that rise (for banks) is reversing.”
Elsewhere, a dramatic repricing of US growth expectations has weakened the US dollar.
It was last hovering around 133.78 yen and $1.0705 per euro.
Nerves have put a ceiling on oil prices, with Brent crude futures falling below $80 a barrel.
US inflation data due later in the day is likely to increase volatility, even if investors see the central bank as prioritizing financial stability.
“The potential for the market to ‘see through’ strong US data in the current environment could de-risk the US dollar through (the CPI) which would mark a significant departure from the fully data-driven environment that existed as recently as several times.” days ago,” said NatWest Markets strategist Jan Nevruzi.