Asian markets down as inflation spooks traders ahead of Fed meet

Markets mostly fell in Asia on Wednesday following a tepid lead from Wall Street, where another forecast-busting inflation reading spooked investors just as the Federal Reserve kicked off its latest policy meeting.

Traders have been keeping their powder dry ahead of the closely watched gathering of US central bank officials, who are discussing plans for their ultra-loose measures in the face of a blistering economic recovery from last year’s coronavirus-induced collapse.

Fed largesse and colossal government spending have been key to spurring the rebound and a more than one-year equities rally, with the rollout of vaccines and easing of containment measures providing extra fuel.

But there is a fear that the support including vast Fed bond-buying and record low interest rates — will prove to be a double-edged sword as prices soar and the economy overheats, leading to a sharp hike in borrowing costs.

Bank officials have consistently sought to assure markets that the expected surge in inflation will be temporary and monetary policy will be kept accommodative for as long as the economy needs it.

However, traders remain sceptical, especially after the latest batch of US data, which showed the producer price index hit 6.6 percent in May, above forecasts and the highest since current records began in 2010, fuelling concerns the rises could filter through to shops. Retail sales fell more than estimated, pointing to a bumpy recovery.

Tuesday’s reading came days after the consumer price index came in at a 13-year high.

In the latest sign that the issue is causing a headache around the world, British data Wednesday showed inflation there came in far higher than expected and at the strongest level in two years. The news sent the pound up against the dollar and euro.

– ‘A lot of nerves’ –
While the general outlook for equities remains positive, there is a continuing worry that the Fed’s first interest rate rise could come earlier than initially thought.

And the conclusion later in the day of the bank’s meeting will be pored over for any clues about its plans, including a possible indication of when it will begin tapering its bond-buying.

“The outlook looks pretty positive but a lot of investors are asking for there to be better clarity on when we are going to have some start to the taper,” Julie Biel, at Kayne Anderson Rudnick, told Bloomberg TV.

“There’s a lot of nerves that we are going to wait too long, the economy is going to overheat and then we’re going to have to taper all at once, so there are a lot of duelling pressures.”

After all three main Wall Street indexes fell, Asia struggled.

Tokyo, Hong Kong, Shanghai, Singapore, Wellington, Manila, Mumbai and Taipei all fell though Sydney, Seoul, Bangkok and Jakarta rose.

London and Paris rose in early European trade but Frankfurt inched down.

Oil prices, however, extended their upward spiral, with Brent at a two-year high and WTI touching levels not seen since late 2018 thanks to an expectation that demand will continue to improve this year and next.

“It has been a direct path up for oil for a month now, fuelled by optimism over rising consumption as global vaccination continues in earnest,” said Howie Lee of Oversea-Chinese Banking Corp.

“We see the market in supply deficit for the rest of 2021, and may peak at $80 before year-end.”

– Key figures at 0810 GMT –

Tokyo – Nikkei 225: DOWN 0.5 percent at 29,291.01 (close)

Hong Kong – Hang Seng Index: DOWN 0.7 percent at 28,436.84 (close)

Shanghai – Composite: DOWN 1.1 percent at 3,518.33 (close)

London – FTSE 100: UP 0.3 percent at 7,196.63

West Texas Intermediate: UP 0.4 percent at $72.43 per barrel

Brent North Sea crude: UP 0.4 percent at $74.28 per barrel

Pound/dollar: UP at $1.4118 from $1.4080 at 2050 GMT

Euro/pound: DOWN at 85.94 pence from 86.08 pence

Dollar/yen: DOWN at 109.94 yen from 110.06 yen

Euro/dollar: UP at $1.2132 from $1.2126

New York – Dow: DOWN 0.3 percent at 34,299.33 (close)