Asia markets feel the heat as Fed rate-hike bets gain steam

Asian markets were rattled on Friday by growing expectations that the Federal Reserve will raise interest rates further. Japan's sovereign bond yields climbed, the yen hovered near the 160 mark against the dollar, and bitcoin tumbled below $69,000. Early gains across regional equities largely faded, as ongoing concerns about leadership changes at Nvidia weighed on artificial intelligence-related stocks.

Fed and rates

Japan's 10-year government bond yield increased by roughly 7 basis points to about 2.87%, its highest level of the session. Japanese bonds tracked declines in US Treasuries, which slid for a second consecutive day as traders boosted their bets on more aggressive rate hikes from the Fed. The 10-year US Treasury yield was trading close to 5.13%. New York Fed President John Williams said late on Thursday that inflation remains persistently elevated and that the central bank will need to act over time to guide it back to 2%. He characterised the US economy as strengthening without overheating. His comments followed this week's October consumer price data, which came in above expectations and led markets to assign a high probability of a quarter-point rate increase at the Fed's 9 December meeting, along with a small chance of a half-point move.

Yen and Japan

The dollar-yen exchange rate was trading near 159.90. Finance Minister Satsuki Katayama said she is observing one-sided and rapid currency moves and will maintain contact with the US Treasury to take appropriate steps. She noted that the two countries outlined a shared approach on currencies during their recent summit. She declined to comment on potential intervention in the currency market. Her remarks followed a New York Fed disclosure that the US Treasury bought yen in July, marking its first yen-buying intervention since 1998, and that Japan conducted its own intervention simultaneously. Katayama also said the government will move forward winter subsidies for utility bills to help reduce household energy costs.

Oil and geopolitics

Brent crude was trading near $95.70 a barrel and West Texas Intermediate around $88.40, both slightly lower. This was despite a claim by Iran's Revolutionary Guards that they destroyed a US early-warning radar in Bahrain in retaliation for an attack on a telecommunications tower in Sirik. The claim could not be independently verified, and there was no immediate response from the US. The Guards also warned companies collaborating with the US about oil shipments through the Strait of Hormuz. Barclays said the market is underestimating the risks, noting that Middle East oil flows remain at about 85% of pre-war levels and that inventories outside China are low. Goldman Sachs also said the risks to its oil price forecast are tilted to the upside. Airlines are feeling the pinch as fuel hedges taken out before the conflict expire, with jet fuel prices near $148 a barrel.

Asian equities

Japan's Nikkei 225 was up about 0.8% near 61,300 in afternoon trading, down from a midday gain of roughly 1.4%. The Topix rose about 0.3%. South Korea's Kospi reversed an early 2% advance to trade about 0.7% lower near 5,300, with SK Hynix falling more than 2% and Samsung Electronics declining about 0.6%. The Kosdaq held a gain of roughly 1.5%. Hong Kong's Hang Seng dropped about 1% to near 23,770, while the Shanghai Composite edged up about 0.2%.

Jensen Huang's resignation as chief executive of Nvidia remained the primary drag on AI-related stocks. Nvidia shares fell about 3% in extended US trading, and South Korea's Naver also declined. Citi said investors may consider AMD, Arista and Broadcom as alternatives. In China, SMIC posted record third-quarter revenue of about $3.19 billion and more than doubled its profit. Its co-chief executive said full-year revenue should exceed $12 billion but warned that a tight supply of chipmaking equipment could disrupt capital spending.

AI and tech

Earnings continued to bolster the AI spending narrative. Cisco beat expectations and raised its full-year outlook on AI networking demand from hyperscale cloud providers. Applied Materials issued guidance above consensus estimates, and Cerebras reported record revenue with a backlog of around $26 billion. Goldman Sachs predicted that annual AI-related spending will reach $1.4 trillion by the end of 2027, equivalent to nearly 4% of the US economy. ByteDance plans a share buyback valuing the company at about $400 billion, according to a report.

Gold and crypto

Gold rose about 0.7% to near $3,914 and silver traded around $50. BlackRock described the outlook for gold as more balanced, with central bank purchases offsetting pressure from higher real yields and a strong dollar. Société Générale expects the January commodity index rebalancing to add about $3.3 billion in net buying of gold futures. Bitcoin dropped more than 6% to below $69,000, as US spot bitcoin ETFs extended a streak of outflows that has pushed November's withdrawals to nearly $2 billion.

Australia and New Zealand

The Australian dollar traded near 0.6800 and the New Zealand dollar near 0.5540. The yield advantage that Australian 10-year bonds held over Treasuries earlier in the year has vanished, as the Fed leans toward rate hikes while the Reserve Bank of Australia appears to be on hold. UBS expects the RBA to maintain restrictive policy, with no rate cuts before late 2027. In New Zealand, the manufacturing PMI eased to 54.9 in October but marked a 16th consecutive month of expansion.

Coming up

Anthropic is scheduled to price its initial public offering on 18 November, with Nasdaq trading set to begin the following day. The deal is reported to be roughly six times oversubscribed.