Asian Stocks Drop, Treasury Yields Near High as Markets Brace for Aggressive U.S. Rate Rise

Asian shares joined Wall Street and Europe in surrendering some recent gains on Friday, retreating on the possibility of faster-than-expected U.S. interest rate increases that boosted 10-year U.S. Treasury yields to an 18-month high overnight.

European shares were headed for a lower start, with financial spreadbetters expecting the Euro STOXX 50 index to open 0.8 percent lower, Britain’s FTSE 100 to shed 0.7 percent and Germany’s DAX to begin the day 0.6 percent lower.

Investors in Europe remain nervous ahead of a constitutional referendum in Italy and a presidential election in Austria this weekend.

Yields for 10-year U.S. Treasuries pulled back to 2.4357 percent on Friday, after touching an 18-month high of 2.492 percent on Thursday.

Investors will be looking to the U.S. non-farm payrolls report later in the day for further evidence of improvement in the economy, after data showed factory activity accelerating in November and construction spending at a seven-month high in October.

The strong data have boosted interest rate expectations, which have already been running high due to anticipated inflationary pressures from rising oil prices and President-elect Donald Trump’s promises of fiscal stimulus.

“We’ve seen a super strong streak of data coming out of the U.S. and the market is starting to price, with a higher certainty, more aggressive rate hikes by the Fed,” said Christopher Moltke-Leth, head of institutional client trading at Saxo Capital Markets in Singapore.

“This is a concern for stocks.”

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.9 percent, and was on track to end the week 0.3 percent lower.

Japan’s Nikkei, which jumped to an 11-month high on Thursday, closed down 0.5 percent on Friday, but still posted a weekly gain of 0.24 percent.

China’s CSI 300 index retreated 1 percent, shrinking gains for the week to 0.2 percent. Hong Kong’s Hang Seng index, Asia’s biggest decliner on Friday with a 1.2 percent drop, is heading for a 0.6 percent weekly loss.

South Korean shares dropped 0.7 percent, poised for a loss of 0.2 percent for the week, after opposition parties said they would propose a motion later on Friday to impeach President Park Geun-hye over an influence-peddling scandal, with the intention of holding a vote on her impeachment on Dec. 9.

Also contributing to higher inflation expectations is the recent jump in oil prices.

Global benchmark Brent futures jumped to a 16-month high of $54.53 a barrel on Thursday after the Organization of Petroleum Exporting Countries agreed its first output cuts since 2008. Russia also agreed to reduce production for the first time in 15 years.

They pulled back 1.2 percent on Friday to $53.32 as investors took profits, but are set for a weekly rise of 12.9 percent.

Having climbed almost 13 percent in the past two days, U.S. crude surrendered some gains on Friday, falling 0.8 percent to $50.64. It is on track for an increase of 9.9 percent this week.

On Wall Street, while the Dow Jones Industrial Average set a record closing high, the S&P 500 and the Nasdaq ended the day with losses as expensive technology stocks pulled back.

The dollar, which hit the highest level since February versus the yen earlier on Thursday, was flat at 114.055 yen amid caution over the jobs report.

It remains on track for a weekly gain of 0.8 percent.

“The dollar could test the 115 yen threshold depending on how the U.S. jobs report turns out,” said Daisuke Karakama, market economist at Mizuho Bank.

The dollar index, which tracks the greenback against a basket of six major global peers, slipped 0.3 percent on Friday, extending losses for the week to 0.7 percent.

The British pound touched a near-two-month high versus the dollar on Thursday after Brexit minister David Davis said Britain would consider paying into the European Union budget for market access.

Sterling added 0.2 percent from Thursday’s close to trade at $1.2617 on Friday, heading for a weekly rise of 1.1 percent.

The euro also strengthened on Thursday, rising 0.7 percent, and added 0.2 percent to $1.06825 on Friday, putting it on track for a 1 percent increase this week.