Equities rose in Asia on Monday as investors took a breather following last week’s heavy selling, with a drop in US Treasury yields giving markets some much-needed stability, while the passage of Joe Biden’s stimulus through the House provided some cheer.
However, observers warned that trading floors were still gripped by fears the expected global economic recovery will fuel inflation and force a hike in interest rates earlier than previously thought, removing a key pillar of the surge in world markets for the past year.
In a bid to calm markets, several central banks — including in Japan, South Korea and the European Union — sought at the weekend reiterated their pledges to maintain their ultra-loose monetary policies for as long as needed. Australia’s led the way by ramping up its asset purchases to keep government yields low.
The steep losses last week provided an opportunity for bargain-buyers Monday, sending Asia rallying with Tokyo up more than two percent, while Hong Kong and Sydney put on more than one percent. Shanghai, Singapore, Jakarta and Manila also enjoyed healthy gains. Seoul and Taipei were closed for holidays.
However, fears about a spike in inflation continue to linger, and while the imminent passage of Biden’s vast rescue package is expected to bring crucial relief to the economy and struggling Americans, many traders see it as likely to add to the upward surge in prices.
Analysts said reassurances from the Federal Reserve were not easing those concerns.
“The market is testing the Fed and global central banks as to how serious they are here,” Al Lord, at Lexerd Capital Management, told Bloomberg TV. “There are growth expectations and growing inflation concerns, and that’s playing out in the markets.”
– Canary in the mine –
And National Australia’s Rodrigo Catril added while the fall in Treasury yields on Friday was welcome, it felt “like a pause for air, rather than the catalyst for a move towards calmer waters”.
“Market participants remain nervous over the prospect of higher inflation as economies look to reopen aided by vaccine roll outs, high levels of savings along with solid fiscal and monetary support.”
Still, there is a feeling that the wobble in markets was to be expected after seeing huge gains over the past 12 months, with some experts recently warning of a correction as valuations had appeared to run too high.
And Axi strategist Stephen Innes pointed out that the reason yields were rising was because of the strong outlook for the global economic recovery.
“While investors will forever be keeping an eye on the canary in the inflation coal mine, the sun always rises on a Monday,” he said in a note.
“It is still fundamentally good news that the sell-offs economic underpinnings — increasing mobility, inflation, and US stimulus — are still intact, with global vaccinations rolling out faster than expected and the US Feb financial data looking good.”
Oil prices also rebounded after a sharp drop Friday, with focus on a key meeting of OPEC and other major producers on Thursday where they will discuss the huge output cuts that have provided much-needed support to the market.
Russia is said to be keen to turn on the taps again but Saudi Arabia prefers the status quo.
“It will be difficult for the Saudis’ cautious stance to prevail in a higher oil price situation,” Innes added.
“But Saudi Arabia has flexibility concerning its unilateral one-million-barrels-a-day cut. This was meant to apply for February and March, but Saudi may choose to delay the return of some or all of this production to keep prices high, even if the rest of OPEC+ favours a production increase.”