Asia Stocks Fall, Major Test Ahead for UK Bonds

SYDNEY, Oct 17 (Reuters) – Asian stock markets fell on Monday after another battering for Wall Street, as investors braced for a further drastic tightening of global financial conditions, with all the risks of recession that comes with it.

Financial stability concerns added to the corrosive mix with all eyes on UK bonds now that the Bank of England’s (BoE) emergency buying spree is over.

Prime Minister Liz Truss’ decision to sack her finance minister could help reassure investors, but her own fate remains unclear as media reports Conservative lawmakers will try to replace her this week.

BoE Governor Andrew Bailey warned over the weekend that interest rates may now need to rise higher than was thought just a couple of months ago.

“The BoE was doing emergency bond buying that is technically identical to QE with one hand, while furiously raising the benchmark rate with the other,” the ANZ analysts said in a note.

“Monday’s market action will provide a test, not only for the survival of Truss’s low-tax vision, but also for his political future.”

Sterling was trading down 0.4% at $1.1219, but was off an early high with little trading in Asia. FTSE futures fell 0.5% and EUROSTOXX 50 futures fell 0.6%.

MSCI’s broadest index of Asia-Pacific stocks outside of Japan (.MIAPJ0000PUS) it declined 1.2% and returned to last week’s two-and-a-half-year low.

japan nikkei (.N225) shed 1.4% and South Korea (.KS11) 0.1%. chinese blue chips (.CSI300) fell 0.4% ahead of GDP data to be released on Tuesday.

S&P 500 futures rose 0.4% after Friday’s sharp decline, while Nasdaq futures rose 0.3%.

Although the S&P is 25% below its peak, BofA economist Jared Woodard warned that the slide was not over as the world transitioned from two decades of 2% inflation to a time of 2% inflation. 5%.

“$70 trillion of ‘new’ technology, growth and government bond assets priced for a 2% world are vulnerable to these secular changes as ‘old’ industries like energy and materials emerge, reversing decades of investment insufficient,” he wrote in a note.

“Rotating 60/40 proxies and buying what is scarce (energy, food, energy) is the best way for investors to diversify.”

INTERVENTION SURVEILLANCE

A hot report on US consumer prices and rising inflation expectations have markets expecting the Federal Reserve to raise rates by 75 basis points next month, and likely the same again in December.

A host of Fed policymakers will be speaking this week, so there will be plenty of opportunity for aggressive headlines. Earnings season also continues with Tesla Inc. (TSLA.O)Netflix (NFLX.O) and Johnson & Johnson (JNJ.N) report, among others.

Goldman Sachs Group Inc. (SG.N) also reports this week and the WSJ reported that the investment bank plans to restructure its largest businesses into three divisions.

In China, the Communist Party Congress is expected to give President Xi Jinping a third term, while there could be a reshuffling of major economic roles as incumbents near retirement age or term limits.

In currency markets, the dollar remains king as investors price in US rates peaking at around 5%.

The yen has been hit particularly hard as the Bank of Japan sticks to its super-loose policy, while authorities refrained from intervening last week, even as the dollar broke above 148.00 to hit 32-year highs.

Earlier Monday, the greenback was up at 148.73 yen and headed for the next target at 150.00.

The euro was trading at $0.9733, having been more stable last week, while the US dollar index fell a fraction to 113.20.

The rise in the dollar and global bond yields has been a drag on gold, which was stuck at $1,648 an ounce.

Oil prices were trying to recover after sinking more than 6% last week as fears of slowing demand outpaced OPEC’s plans to cut output.

Brent firmed 64 cents at $92.27 a barrel, while US crude rose 55 cents to $86.16 a barrel.

Information from Wayne Cole; Edited by Himani Sarkar, Ana Nicolaci da Costa and Muralikumar Anantharaman

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