Asian markets came under clear pressure as U.S. Treasury yields resumed their rise and the dollar strengthened after better than expected U.S. economic data brought inflation concerns back into focus. The U.S. Dollar Index held near 101.09 after touching 101.2, benefiting from a repricing of the outlook for U.S. interest rates. At the same time, weak demand at a $70 billion auction of five year Treasury notes triggered another round of bond selling, pushing the yield above 5% for the first time since 2007. Comments from Federal Reserve Governor Michael Barr reinforced this trend after he said that economic strength and inflation risks could require further rate increases. Market pricing subsequently lifted the probability of an October rate hike to around 70%, compared with roughly 50% a week earlier.
Inflation expectations also received additional support from energy prices, with Brent crude trading near $103 a barrel after a jump of almost 4% amid continued tensions between Washington and Tehran and uncertainty surrounding navigation through the Strait of Hormuz. Any prolonged disruption to supplies or shipping would keep oil as a direct source of inflationary pressure, giving the Federal Reserve more room to maintain a restrictive policy stance. These conditions quickly affected Asian currencies, with the Japanese yen remaining near a three week low despite the yield on ten year Japanese government bonds reaching its highest level in three decades. Continued weakness in the yen despite higher domestic yields suggests that markets are not yet convinced that the Bank of Japan is prepared to tighten policy quickly enough to narrow the gap with U.S. yields.
Elsewhere in currency markets, the South Korean won and Indonesian rupiah came under pressure, while moves in the Australian and New Zealand dollars remained limited. Bank Indonesia kept its benchmark interest rate unchanged at 5.75% while continuing measures aimed at supporting the currency and attracting foreign capital. The Indian rupee posted a modest improvement as the central bank continued to absorb excess liquidity. The Chinese yuan also weakened slightly after a recent rally had previously taken it to its strongest level in more than three and a half years. Its next moves are likely to remain closely tied to developments in talks between Washington and Beijing, particularly on trade, technology and rare earth minerals.
In equities, higher yields placed direct pressure on most Asian markets because rising bond yields increase financing costs and reduce the present value of future corporate earnings, a factor that tends to weigh more heavily on technology and growth stocks. Chinese equities declined, with the Shanghai Composite falling around 1% and the CSI 300 losing 1.3%, while the Hang Seng dropped 0.6% and Hong Kong’s technology index declined around 1%. Japanese equities performed better after the market reopened following a three day holiday, with the Nikkei 225 rising 1.5% and the TOPIX gaining 0.2%. However, higher Japanese and U.S. bond yields limited the strength of the advance.
The bond market remains the main driver of asset pricing, with the U.S. ten year Treasury yield moving above 5% to around 5.11%, its highest level since 2007. The two year yield approached 4.9%, while the thirty year yield moved above 5.4%. If yields remain around these levels, markets are likely to continue reassessing the prospect of interest rates staying elevated for longer. That environment supports the dollar while creating pressure on equities and other risk sensitive assets. High oil prices add another layer of pressure because elevated energy costs make it more difficult for inflation to return toward central bank targets at the desired pace.
In Australia, the latest labour market report delivered a mixed picture. Employment growth exceeded expectations, but the unemployment rate climbed to its highest level in five years as more people entered the labour force. Ahead of the Reserve Bank of Australia’s policy decision on September 29, expectations of another rate increase remained in place, as solid employment growth gives policymakers room to retain a restrictive stance despite the increase in unemployment. The ASX 200 fell 0.7% as broader pressure across regional markets continued.
On the U.S. China trade front, markets received some support after the two sides agreed to extend the Busan Agreement until January 10 instead of allowing it to expire on November 10. The extension delays the risk of an immediate return to tariff escalation and gives Washington and Beijing additional time to negotiate a broader economic agreement. However, major issues remain unresolved, including artificial intelligence, rare earth minerals, purchases of U.S. aircraft and agricultural products. The outcome of talks between Donald Trump and Xi Jinping will therefore remain important for the direction of the yuan, Chinese equities and broader risk sentiment across Asian markets.
The broader outlook for Asia remains tied to three main factors: the direction of U.S. Treasury yields, the path of oil prices and the outcome of U.S. China negotiations. Persistently high yields would continue to support the dollar and weigh on risk assets, while an easing in energy prices or meaningful progress in trade discussions could give Asian currencies and equity markets more room to regain stability.
Stay informed about global markets through our previous analyses. and Now, you can also benefit from LDN company services via the LDN Global Markets trading platform.
