Asia shares in cautious temper, oil retains climbing | Monetary Markets

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Asian equity markets got off to a cautious start into a week likely to see a rise in UK interest rates and mixed reports on US jobs and manufacturing, while rising oil prices added to inflation concerns.

Data released on Sunday showed China’s factory activities slowed in January as a resurgence of COVID-19 cases and strict lockdowns impacted production and demand.

The standoff over Ukraine remains a thorn in the side of the market amid fears that a Russian invasion would also disrupt vital gas supplies to Western Europe.

The Lunar New Year holiday made for weak conditions, and MSCI’s broadest index of Asia-Pacific stocks outside Japan fell 0.1 percent in slow trade.

Japan’s Nikkei fell 0.3 percent as industrial production and retail sales data came in below forecasts. S&P 500 futures and Nasdaq futures both fell 0.3 percent, reversing part of Friday’s gain.

The Bank of England is likely to hike rates again this week, continuing the global trend towards tighter monetary policy. The European Central Bank also meets this week but is expected to stick to its argument that inflation will fall over time.

Markets have priced in five Federal Reserve interest rate hikes to 1.25 percent this year, although investors still expect interest rates to remain at a historically low level of 1.75 to 2.0 percent.

Bank of America (BofA) analysts think this isn’t nearly hawkish enough.

“Underrated Fed rate hikes”

“We caution that markets undervalued the Fed’s rate hikes early in the last two rate hike cycles, and we believe this will be the case again,” said BofA Chief Economist Ethan Harris.

“We expect the Fed to hike rates by 25 basis points at each remaining meeting this year beginning in March, for a total of seven hikes, with four more hikes next year,” he added. “This would increase the final interest rate to 2.75 to 3.00 percent by the end of 2023, which should slow down growth and inflation.”

The Fed’s schedule is sparse this week with only three regional presidents scheduled to speak, but there is plenty of data highlighted by the ISM manufacturing and services readings and January jobs report.

Amid a spike in coronavirus cases and inclement weather, payroll headlines are expected to be weak. The median forecast is for a rise of just 155,000, while forecasts range from a rise of 385,000 to a fall of 250,000.

“We expect nonfarm payrolls to increase by just 50,000 in January and the unemployment rate to remain stable at 3.9 percent,” Barclays analysts said in a statement.

“We see downside risk to our forecast given the 8.8 million adults who did not work to care for someone sick or were sick themselves in the week of January 11.”

The Fed’s hawkish turn has seen US 10-year Treasury yields rise 27 basis points to 1.78% this month, making bonds relatively more attractive relative to equities and particularly growth stocks with stretched valuations.

It has also strengthened the US dollar, which is up 1.7 percent this month against a basket of its main rivals to the highest since July 2020 at 97.441.

The euro lost 1.7 percent in the past week alone to its lowest level since June 2020 and last traded at $1.1151. The dollar actually appreciated against the safe-haven yen, rising 1.3 percent to 115.27 yen last week.

Higher yields were a deadweight for non-yielding gold, and the metal stalled at $1,789 an ounce after shedding 2.4 percent last week.

Oil prices nearly hit a seven-year high after rising for six straight weeks as geopolitical tensions exacerbated concerns over energy shortages.

Brent rose 94 cents to $90.97 a barrel, while US crude rose 89 cents to $87.71 a barrel.