Markets React as Investors Await Powell's Speech: Asian Stocks Follow Wall Street's Lead

The markets are in a state of flux as Asian stocks mirror the downward trend witnessed on Wall Street. All eyes are now turned to Jerome Powell's upcoming speech, anticipated to provide insights into the trajectory of interest rates.

Equity Markets Respond:

Following the lead of Wall Street, Asian stock markets in countries like Japan, Australia, South Korea, and China have experienced declines. Notably, Hong Kong-listed technology stocks saw a significant drop, echoing the heavy sell-off of US tech shares recently. The Nasdaq 100 marked its worst day in three weeks, plummeting by 2.2%. Meanwhile, the S&P 500 witnessed a drop of over 1%, nearly erasing its gains for the week. In Asian trading, futures contracts for the major US benchmarks showed minimal change.

Treasuries and Yields:

Treasury yields, a key indicator of the bond market, remained relatively stable after two-year yields crossed the 5% threshold on Thursday. This contributed to the strengthening of the US dollar. Across the Asia-Pacific region, bond yields in Australia and New Zealand experienced marginal increases. This led to a positive impact on the US dollar. The yen, however, weakened beyond 146 per dollar following Tokyo's inflation data, which came in slightly below forecasts.

Chinese Market Challenges:

Despite authorities' efforts to shore up the market, Chinese stocks continued to decline. In an attempt to bolster the struggling market, the country's top financial institutions were urged to lend their support. Nonetheless, the market witnessed a slump. In response, Morgan Stanley reduced price targets for Chinese equity benchmarks for the second time in three months. Additionally, shares in Meituan, a major player in the industry, declined after the company projected a slowdown in growth for its core meal delivery business.

Focus on Powell's Speech:

Investors are intently focused on the annual gathering of top central bankers in Jackson Hole, Wyoming, where Jerome Powell is scheduled to deliver a speech on Friday. This speech is expected to provide insights into the Federal Reserve's perspective on interest rates and its future plans.

Diverse Opinions on Interest Rates:

In the lead-up to Powell's address, central bank officials have shared varying viewpoints on interest rates. While some, like Susan Collins from the Fed Bank of Boston, believe that rate increases might be necessary, others, such as Patrick Harker from the Philadelphia Federal Reserve, predict that interest rates will remain steady for the rest of the year.

Investor Expectations and Outcomes:

A survey conducted by 22V Research revealed that a majority of investors (78%) anticipate that Powell will emphasize the importance of data dependency in shaping monetary policy. Furthermore, while some investors (21%) expect a "risk-off" market reaction, a significant portion (43%) believe that the impact will be mixed or negligible. About 37% of investors predict a "risk-on" response, indicating optimism.

The "Goldilocks" Rate:

Recent discussions on Wall Street have centered around the concept of the "r-star," a neutral interest rate that neither stimulates nor restrains economic growth. The potential mention or revision of this rate by Powell could have ripple effects across global markets, reshaping perceptions of fair value for Treasury yields.

Powell's Probable Approach:

Analysts suggest that Powell is likely to focus on the short-to-medium-term economic outlook in his speech, steering clear of making a definitive call on the "r-star." This balanced assessment is expected to avoid abrupt hawkishness while acknowledging the Fed's commitment to managing inflation.

Commodities and Other Developments:

Oil prices are poised for a potential second consecutive weekly decline. European natural gas prices witnessed a tumble due to eased strike concerns in Australia. On a positive note, gold and copper are expected to record their first weekly gains, while iron ore is likely to mark its third consecutive weekly gain, fueled by expectations of increased production by Chinese steel mills.

Key Events to Watch:

Besides Powell's speech, investors are closely monitoring the US University of Michigan consumer sentiment report and speeches by Fed Chair Jerome Powell and ECB President Christine Lagarde at the Jackson Hole conference.

Snapshot of Market Moves:

• S&P 500 futures and Nasdaq 100 futures showed minimal change in Asian trading.

• The Japanese Topix index declined by 0.8%.

• Australia's S&P/ASX 200 witnessed a 1% decrease.

• Hong Kong's Hang Seng index dropped by 1%.

• The Shanghai Composite index experienced a 0.5% decline.

Snapshot of Currency Movement:

• The Bloomberg Dollar Spot Index registered a 0.2% increase.

• The euro depreciated by 0.3% against the dollar, reaching $1.0779.

• The Japanese yen weakened by 0.2% against the dollar, with an exchange rate of 146.12 per dollar.

• The offshore yuan also declined by 0.2% to reach 7.2944 per dollar.

Update on Cryptocurrencies:

• Bitcoin observed a slight increase of 0.1%, reaching $26,045.84.

• Ether remained stable at $1,650.57.

Bond Movement Update:

• The yield on 10-year Treasuries remained relatively stable at 4.25%.

• Japan's 10-year yield saw a marginal increase of one basis point, reaching 0.655%.

• Australia's 10-year yield experienced a rise of six basis points, reaching 4.17%.

Commodities Update:

• West Texas Intermediate crude oil prices witnessed a 0.4% rise, reaching $79.36 per barrel.

• Spot gold prices experienced a slight decline of 0.1%, reaching $1,914.25 per ounce.

Also Read: Global Stocks Slide as Inflation Data Sparks Concerns, Pushes Yields Higher