Stocks in Asia fell Thursday as central bankers amplified hawkish messages in their quest to rein in inflation, weighing on risk assets. Oil sank.

An MSCI Inc. gauge of Asia-Pacific shares retreated for a second day, with equities in Hong Kong leading declines amid tough virus curbs. US contracts fluctuated after stocks dropped on Wall Street. US manufacturing activity and job openings data fueled concern the Federal Reserve will need to get more restrictive to slow runaway price gains. European futures were steady.

Treasuries held losses, with 10-year yields near 2.90%. Traders raised bets on the path for rate hikes and the Fed started its balance-sheet reduction process. The dollar was steady while the yen held near 130 per dollar after its recent decline on the prospect of widening interest rate differentials with the US.

Crude oil slid on a report that Saudi Arabia is ready to pump more oil if Russian output declines. OPEC+ is scheduled to meet to discuss supply policy.

JPMorgan Chase & Co.’s Jamie Dimon sounded alarm bells on the economy. Dimon warned investors to prepare for an economic “hurricane.” In contrast, JPMorgan’s bullish strategist Marko Kolanovic expects stocks to rebound by the end of the year, underscoring the increasing debate as markets are buffeted by challenges from tightening monetary policy to the war in Ukraine.

Investors are on edge over whether the Fed’s tighter policies will induce a recession. A chorus of Fed officials has fallen behind calls to keep hiking to counter price pressures. Mary Daly of the San Francisco Fed and her more hawkish colleague James Bullard of St. Louis both backed a plan to raise rates by 50 basis points this month, while Richmond’s Thomas Barkin said it made “perfect sense” to tighten policy.

“We do see the rise in probability of a recession in the second half of this year, potentially persisting into 2023 as the Fed continues to battle inflation,” Tracie McMillion, Wells Fargo Investment Institute head of global asset allocation strategy, said on Bloomberg Television.

McMillion also cautioned that markets haven’t fully priced in the impact of the Fed’s balance-sheet reduction. “The impact of quantitative tightening starting to roll off the Fed’s balance sheet this month is really untested and unprecedented. Our guess is that it’s probably not fully priced into markets,” she said.

Elsewhere, the Bank of Canada raised its overnight rate by a half percentage point, as expected, and warned that it may act “more forcefully” if needed to tackle inflation.

Chinese stocks outperformed. Beijing ordered state-owned policy banks to set up an 800 billion yuan ($120 billion) line of credit for infrastructure projects as it leans on construction to stimulate an economy battered by coronavirus lockdowns.

How will markets be affected by the Fed’s quantitative tightening? QT officially starts Wednesday and is the theme of this week’s MLIV Pulse survey. Click here to participate anonymously.

Source:
courtesy of BLOOMBERG

by Andreea Papuc

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