Asian markets sink after Wall Street enters bear market

Asia-Pacific equities slid in the wake of a sell-off that plunged stocks on Wall Street into a bear market, as the prospect of aggressive tightening by central banks rattled global investors.

Japan’s Nikkei 225 and China’s CSI 300 index each dropped 2 per cent on Tuesday while Australia’s benchmark S&P/ASX 200 index shed 4.6 per cent.

The falls for Asian markets followed a day of sharp selling on Wall Street, where the S&P 500 tumbled almost 4 per cent to the lowest level since the start of 2021. That left the benchmark down more than 20 per cent from its all-time peak in January, a scenario typically referred to as a bear market.

The rout for global equities was triggered by a higher-than-expected reading US inflation on Friday, which showed consumer prices had jumped 8.6 per cent from a year ago in May as Russia’s invasion of Ukraine raised food and fuel costs.

The surge in consumer inflation has stoked expectations that the US Federal Reserve could implement an extra-large rate rise of 0.75 percentage points at its monetary policy meeting, which concludes on Wednesday.

Economists at Goldman Sachs raised their forecast for the federal funds rate to include rate rises of 0.75 per cent in both June and July, warning that if the Fed’s moves met market expectations, it “would imply a meaningful further drag on growth”.

Line chart of Month-to-date performance (%) showing US stocks enter bear market as losses accelerate

Futures markets showed investors expected the benchmark US federal funds rate to climb to 3.5 per cent by the end of this year, compared with the current range of between 0.75 and 1 per cent. Markets were pointing to a year-end rate of just 2.9 per cent just last week.

“Neither inflation nor the economy is giving clear enough signals of slowing to deter the Fed from its path,” said Steve Englander, head of North America macro strategy at Standard Chartered. He added that StanChart could not rule out a move of up to 1 percentage point.

Growing anticipation of sharper rate rises has also driven up yields on government debt, which rise when bond prices fall. On Tuesday during Asia trading, the yield on the 10-year US Treasury was 3.356 per cent, holding just below the peak touched on Monday that marked the highest level since 2011.

The jump in expectations of higher rate rises has also battered more speculative asset classes, including tech companies and crypto assets.

Hong Kong’s Hang Seng Tech index shed almost 2 per cent on Tuesday after the Nasdaq Composite closed Monday’s session down almost 5 per cent, taking year-to-date losses to more than 30 per cent. Bitcoin fell almost 7 per cent on Tuesday to $21,616, taking the most widely held cryptocurrency more than 50 per cent lower this year.

Equity futures pointed to a let-up in selling for Europe, with the Euro Stoxx 50 expected to rise 0.2 per cent and the FTSE 100 set to rise 0.4 per cent. The S&P 500 was expected to climb back 0.6 per cent.

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