Rising US yields help dollar to 13-1/2 year high, Asian shares slip

Reuters: Asian share markets weakened on Friday as rising US bond yields carried the dollar to a more than 13-1/2 year high against a basket of major currencies, fueled by expectations that President-elect Donald Trump’s policies will lead to higher interest rates.

The post-election shift in expectations has left Asian stocks vulnerable to investors potentially rotating funds out of emerging markets to the United States.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.4% to hover just above its four-month low touched earlier in the week. It looks set to log its fourth straight week of losses.

The dollar’s rise, however, was a boon for Japan’s exporter-driven Nikkei average, which rose 1.0% to a 10-month high.

On Wall Street, the benchmark S&P 500 index rose 0.5% to within a hair’s breadth of its record high, as the prospect of higher interest rates boosted bank stocks and consumer discretionary stocks were helped by favorable economic data and earnings.

US consumer prices posted their biggest increase in six months, while housing starts surged to a nine-year high and jobless claims fell to the lowest level since November 1973.

The data supported the market’s current theme that U.S. growth and inflation is likely to accelerate even faster if the Trump administration cuts taxes, increases fiscal spending, and becomes more protectionist on trade issues.

“The United States has been leading globalisation but now voters said they had enough. They said they want to stop the fall in their wages with fiscal spending and protectionism. This is a very, very big change in trend,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management.

The U.S. elections prompted investors to ditch their once rock-solid conviction that the growth in developed economies will remain tepid because of tough competition from emerging market economies with lower wages.

As investors tried to adjust to the new environment, the 10-year US Treasuries yield rose to 2.338%, its highest since January, compared to around 1.86% before the US election.

The two-year US Treasuries yield rose to a 10 1/2-month high of 1.071%.

Rising yields also reflect market players’ reassessment of the Fed’s policy path down the road, although Federal Reserve Chair Janet Yellen told the Joint Economic Committee of Congress on Thursday that Trump’s election has done nothing to change the Federal Reserve’s plans for a rate increase “relatively soon.”

Yet market perceptions have clearly changed, with money market futures pricing in about a 90% chance of a Fed rate hike in December.

They are also pricing in one or more rate hikes next year, a sea change from before the election when they priced in a less than 50% chance of a 2017 rate hike, assuming the dovish Yellen would be extremely cautious in raising rates.

The dollar rose to 110.34 yen, its highest level since early June. The euro slumped to $1.0620, a low last seen almost a year ago.

The dollar’s index against a basket of six major currencies rose above its “double top” touched in March and December of 2015. The index now stands at its highest level since April 2003.

“Double top” is a technical analysis term describing a currency (or other liquid asset) rising to a high, falling, and then rising again to the same level. Breaking the double top is often seen as a bullish sign by technical analysts.

A rising dollar is particularly a problem for some emerging economies that could see capital outflows if investors shift more funds to the United States.

The Mexican peso, which has been perceived as the most vulnerable to Trump’s policies because of its big exports to the United States, weakened 1% after the central bank raised its policy interest rates by 50 basis points to defend the currency, as the market had expected a bigger hike.

Gold slumped to 5 1/2-month low of $1,211.6 per ounce and oil prices, which have been supported by hopes the Organization of the Petroleum Exporting Countries (OPEC) would reach an agreement to cap production at its meeting in Vienna on Nov. 30, were hit by the dollar’s strength.

Brent crude futures fell 1% in Asia to $46.01 per barrel, down further from Thursday’s two-week high of $47.62.