(Bloomberg) – With Treasury yields reaching 3% on the short sale of tech stocks, traders are busy updating playbooks on what a more hawkish-than-expected Federal Reserve would mean for the markets.
Bloomberg’s Most Read
Mizuho Bank Ltd. urges investors to sell inflated US bond portfolios as 10-year risk rates climb to 3%. Robeco is eyeing Japanese industrial stocks, while DBS Bank Ltd. sees China’s public debt as a safe haven from Fed rate hikes. Invesco Asset Management is seeing technology stocks come under increased selling pressure.
“Repositioning will now be a given with yields likely to climb higher, quantitative tightening accelerating and equity sectors suffering from nosebleeds as the Fed comes out of its swing,” said Vishnu Varathan, head of economics and strategy at Mizuho. “The key thing to weigh here is the acceleration of the Fed’s cut and whether the markets are right with their pricing hikes.”
A T-bill selloff continued on Thursday, also pushing Australia’s yields to Japan higher after minutes from the December Fed meeting showed policymakers considering an earlier-than-expected hike and considering a run-off of its balance sheet. Stocks slipped with benchmarks in Australia and Japan leading the losses after their US peers fell overnight, dragged down by high-priced tech stocks.
Biggest tech sales in a decade fueled stock market rate rout
Market participants are focused on one key piece of the record: Policymakers discussed shrinking their balance sheets soon after the first hike. This is a more aggressive approach than expected, prompting a rethink of how best to position ourselves in the face of rising borrowing costs in the United States.
Swap traders now see a 76% chance that the Fed will raise its key rate by 25 basis points in March, down from just 26% in early December. The 10-year Treasury yield rose two basis points to 1.73% on Thursday, its highest since April. Real yields – those adjusted for inflation – have also jumped 20 basis points in just four days at a rate not seen since the peak of pandemic fears in March 2020.
US benchmark yields are expected to climb towards 2% as markets move into the second half of the year, said Andrew Ticehurst, rate strategist at Nomura Holdings Inc. in Sydney. Australian bonds have the potential to outperform as the omicron wave increases risks to growth, he added.
Currency traders are already looking for pressure points in Asia, with the Thai baht plunging 1%, while commodity currencies like the Australian dollar have fallen.
“Emerging market economies with lower vaccination rates, lower external and fiscal balances like the Philippine peso, Thai baht, Indonesian rupiah and Indian rupee are likely to be at risk,” Wai Ho said Leong, strategist at Modular Asset Management in Singapore.
According to Mitul Kotecha, strategist at TD Securities in Singapore, more “technology sensitive” currencies, such as the Korean won, will also come under pressure from the massive sell-off in the US sector.
On the fixed income front, DBS sees Thai bonds underperforming due to a growing policy gap with the United States.
“Thailand is expected to be one of the laggards in monetary normalization and therefore a widening of the policy differential against the US Fed would weigh on Thai bond yields,” said Duncan Tan, DBS strategist. “Indonesian bonds, having a higher beta, are generally more sensitive to US rate hikes, although any weakness will likely be contained with better defenses this time around. “
Bets on shares
Bets on stocks are more varied.
In Japan, higher long-term US yields are expected to have a positive impact on the country’s banks, but become a drag for companies operating in the United States, according to Tomo Kinoshita, global markets strategist at Invesco Asset Management in Tokyo. Tech stocks could also come under selling pressure, given their past relationship to returns, he added.
The MSCI AC Asia Pacific Communication Services Index fell to its lowest level since June 2020 this week.
Small-cap companies could become targets for short sellers as funding pressures over rising US interest rates intensify.
“The risk is palpable if the Fed is seen to be tightening the screws too quickly,” said Ilya Spivak, head of Greater Asia at DailyFX.
Morgan Stanley, Wells Fargo say large stock rotation carries weight
Others jump at the chance to buy beaten names.
“I still like the manufacturers selected in Japan who are underestimated beneficiaries of automation, electric vehicles, etc. Said Joshua Crabb, portfolio manager at Robeco in Hong Kong.
For Herald van der Linde of HSBC Holdings Plc, head of equity strategy for Asia-Pacific, the rotation to China and Indonesia makes sense because “valuations are low and we expect good growth in 2022”.
Heavily sold emerging market debt is also of interest to some, as the prospect of higher yields to offset riskier paper attracts fund managers.
“We are overweight emerging market high yield bonds,” said Todd Schubert, head of bond research at Bank of Singapore Ltd. “The spread component also provides adequate protection against the negative impact of rising rates.”
(HSBC perspective added in 20th paragraph, Fed tapered in fifth)
Bloomberg Businessweek Most Read
© 2022 Bloomberg LP