Stocks in Asia declined on Wednesday due to the release of higher-than-expected US inflation data. This raised concerns among investors that interest rates could remain elevated for a longer period.
Market watchers in the region were closely monitoring Indonesia’s presidential election. Indonesia, being one of Southeast Asia’s largest economies, is a crucial supplier of strategic resources like nickel.
After the Lunar New Year holiday, trading resumed on Hong Kong’s Hang Seng index, which increased by 0.2% to reach 15,769.95 after initially opening lower. Notably, mainland China’s markets remain closed for the entire week due to the holiday.
Japan’s primary stock gauge, the Nikkei 225, saw a decline of 0.8% to 37,646.37. Similarly, Australia’s S&P/ASX 200 experienced a 1% dip to 7,526.70, while South Korea’s Kospi fell by 1.3% to 2,616.47.
Tuesday saw the S&P 500 drop by 1.4% to 4,953.17 on Wall Street. Traders had been hoping for interest rate cuts from the Federal Reserve, but a surprisingly high inflation report means these cuts might not happen in March as expected.
Tuesday’s report from the Labor Department indicated that the consumer price index (CPI) rose by 0.3% from December to January, surpassing the 0.2% increase recorded in the previous month. Year-on-year, prices saw a 3.1% increase.
The Dow Jones Industrial Average slipped by 1.4% to 38,272.75 from its previous record set the day before. In parallel, the Nasdaq composite, which has been hovering near its peak from 2021, dropped by 1.8% to 15,655.60.
When interest rates rise, it’s tough for investments, especially for high-growth tech firms. Microsoft saw a 2.2% decline, while Amazon dropped by 2.1%, dragging down the whole market.
Lots of stocks in the S&P 500 took a hit, with almost 90% seeing declines. It’s one of the biggest setbacks for the index since its major rally began in late October. This surge was fueled by hopes that inflation was easing, which could prompt the Fed to lower rates and ease pressure on the economy.
Stocks of smaller companies suffered more because higher interest rates can make borrowing money difficult for them. The Russell 2000 index, which follows smaller stocks, plunged by 4%, marking its worst day since two summers ago.
Yields in the bond market rose as traders anticipated the Fed would maintain higher interest rates for a longer period. The yield on the 10-year Treasury climbed to 4.31% from 4.18% on Tuesday. Similarly, the two-year Treasury yield, which is sensitive to Fed expectations, jumped to 4.66% from 4.47%.
According to Alexandra Wilson-Elizondo from Goldman Sachs Asset Management, despite the surprising inflation report, she believes the economy will probably avoid a painful recession as inflation cools down. However, she warns of the risk of a recession due to high interest rates or a potential resurgence in inflation, especially considering the decline in Treasury yields.
The Federal Reserve plans to reduce interest rates three times this year to tackle high inflation, aiming to bring it down to around 2%. Initially, traders anticipated as many as six rate cuts in 2024, but now they’re expecting three or four cuts.
Critics are concerned that stock prices may have surged too rapidly due to overly optimistic expectations for rate cuts and other factors.
Moody’s, a credit-rating company, experienced a significant setback with a 7.9% decline, marking the largest loss in the S&P 500. This drop followed Moody’s reporting weaker-than-expected profits for the latest quarter.
On a positive note, JetBlue Airways surged by 21.6% after activist investor Carl Icahn disclosed he had acquired a stake in the airline, believing its stock was undervalued.
Regarding oil prices, U.S. crude remained stable at $77.86 a barrel, while Brent crude, the international benchmark, slightly decreased to $82.67 a barrel.
The U.S. dollar experienced a slight decline against the Japanese yen, dropping to 150.48 yen from 150.86 yen.
The euro remained unchanged at $1.0710, similar to its previous value of $1.0712.