Asian Shares Drop Amid Concerns Over Rising Bond Yields, US Inflation

Photo : Reuters

Asian stocks experienced a significant slump on Wednesday, as investors reacted to a sharp rise in U.S. bond yields ahead of crucial inflation data. The increase in yields, which came after the U.S. market reopened following the Veterans Day holiday, sent the U.S. dollar to a three-month high against the Japanese yen. This shift in bond yields and the strengthening dollar were driven by growing concerns about U.S. fiscal policy under President-elect Donald Trump, with expectations that his proposed economic policies will lead to higher deficits, increased government borrowing, and potentially higher inflation.

Bond yields have surged since Trump's election victory, fueled by expectations that his administration will cut taxes and impose tariffs, both of which are anticipated to push up government borrowing. These policies are seen by analysts as likely to spur inflation, which could complicate the Federal Reserve's path to lowering interest rates. The bond yield rise has already led to a stall in the U.S. stock market rally, which had previously reached record highs under these expectations.

Kyle Rodda, a senior financial markets analyst at Capital.com, commented, “It all continues to be a part of the Trump trade, which, at its core, is about deeper deficit spending. However, as has proven the case in other market melt-ups, a tug-of-war eventually emerges between stocks and bonds, as higher risk-free rates strangle valuations.” Bitcoin also made a move towards its all-time high, inching closer to the $90,000 mark as markets speculated that Trump's regulatory stance could benefit cryptocurrencies, particularly after his comments about making the U.S. the "crypto capital of the planet."

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Commodities across the board weakened amid investor concern over the outlook for China, which could bear the brunt of Trump's threatened tariffs. Despite some stimulus efforts from Beijing, there has been little optimism about a quick recovery in the Chinese economy. The negative sentiment surrounding China was reflected in the movements of Asian stock markets. The Hong Kong Hang Seng index dropped by 0.9%, while a subindex of mainland Chinese property stocks fell by 1.3%. China's blue-chip stocks remained flat.

Japan’s Nikkei index fell by 1.1%, while South Korea’s Kospi dropped by 1.2%. In Australia, the benchmark stock index fell 1.1%, weighed down by declines in commodity shares. U.S. S&P 500 futures also pointed lower, suggesting more losses for Wall Street in the next session.

Treasury yields saw a notable jump, with the two-year yield climbing to 4.34%, reaching its highest level since July. The ten-year yield hovered around 4.43%, nearing the four-month high of 4.479% hit a week ago following Trump’s election victory. This surge in bond yields led the U.S. dollar to rise to 154.94 yen, its highest level since July 30, before settling at 154.56 yen.

The dollar’s strength against the yen pushed the currency pair close to the 155 yen per dollar level, which many market participants view as a trigger for potential verbal intervention by Japanese authorities. Japan’s finance ministry currency official, Atsushi Mimura, remarked last week that Japan is ready to take “appropriate actions if necessary” to curb excessive currency fluctuations.

The U.S. dollar index, which measures the greenback against a basket of six major currencies, stood at 105.92, not far from its Tuesday high of 106.17, the strongest level since May 1. Traders were also awaiting U.S. inflation data, particularly the consumer price index (CPI), with a 60% chance that the Federal Reserve will cut rates by a quarter point at its December 18 meeting. A hot CPI reading could decrease those odds, with economists expecting a 0.3% monthly rise in the core CPI.

The euro weakened, dropping to $1.0625, just above a one-year low of $1.0595 hit earlier. Europe, like China, faces significant risks from Trump’s tariff policies, with the incoming U.S. president previously stating that the European Union would “pay a big price” for not buying enough U.S. exports. In commodity markets, copper prices fell by 2% to their lowest in two months, while crude oil prices remained weak after OPEC lowered its forecast for global oil demand growth. Brent crude edged up by 0.2% to $72 per barrel, while U.S. West Texas Intermediate (WTI) crude rose by 0.2% to $68.26.

Gold prices tried to recover from a recent slump, rising by 0.4% to around $2,607 per ounce, after hitting a nearly two-month low of $2,589.59 earlier, pressured by the strength of the dollar. The market’s focus is likely to remain on the developments surrounding the U.S. inflation data and its potential impact on future Fed policy decisions.

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