Asian shares were pressured on Friday after lingering banking stability concerns gripped Wall Street, while bonds bet the recent slew of rate hikes by central banks will be among the last of the cycle, allowing for policy relief later in the year.
The caution is set to extend to Europe, with pan-region Euro Stoxx 50 futures down 0.6%. Both S&P 500 futures and Nasdaq futures fluctuated between gains and losses and were last up about 0.2%.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) eased 0.2% on Friday, although it was heading for a still solid weekly gain of 2%. Japan’s Nikkei (.N225) also slid 0.2%.
Both China’s blue-chip index (.CSI300) and Hong Kong’s Hang Seng (.HSI) lost 0.3%, with sentiment weighed by persisting geopolitical tensions between the world’s two biggest economies.
The Biden administration on Thursday added 14 Chinese companies to a red flag list for exports, while U.S. lawmakers attacked TikTok for its ties with China, pushing further for a ban on the app nationwide.
Data on Friday showed Japan’s manufacturing activity contracted for a fifth straight month in March, adding to evidence of sputtering global demand, while core consumer inflation in Japan eased, although price pressures persist.
On Wall Street, the Dow Jones (.DJI) closed up 0.2% and the S&P 500 (.SPX) rose 0.3%, after a bout of choppy trading late in the day. The Nasdaq Composite Index (.IXIC) jumped 1%, as falling Treasury yields boosted shares of technology firms.
Treasury Secretary Janet Yellen said on Thursday that she was prepared to take further action to ensure bank deposits are safe, a day after saying that blanket insurance was not on the agenda, prompting a renewed sell-off in banking stocks.
“They’re still struggling with what they will do in terms of uninsured bank deposits…that’s what’s partly given us the roller coaster ride a little bit in share markets,” said Shane Oliver, chief economist at AMP.
“The bottom line is the Federal Reserve has raised interest rates aggressively, and they will invariably keep going until something breaks. But at the moment, they’re not sure whether something’s broken or not, despite the turmoil in banks.”
Markets, however, have bet on a recession and incoming rate cuts. Every Treasury yield from one month to 30-years was under the overnight cash rate, a phenomenon that has in the past heralded a nearing recession.
Treasury yields were trying to find a floor amid the market volatility. Two-year Treasury yields , which fell a whopping 125 basis points within just two and a half weeks, were steady at 3.7961% on Friday.
Ten-year yields held at 3.3855%, after edging 9 basis points lower in the previous session.
Investors are leaning towards a pause from the Fed at the policy meeting in May, after the latest dovish hike on Wednesday.
They have also priced in rate cuts of accumulated 80 basis points to about 4% by the end of the year amid fears that policy tightening and a brewing banking crisis could drive the U.S. economy into a recession, despite push-back from Chair Jerome Powell.
“It is an environment of uncertainty. I mean, it’s not as if the Fed knows either and the market could be right,” said Oliver at AMP.
The Fed’s emergency lending to banks, which hit record levels last week, remained high in the latest week amid ongoing anxiety over the state of the financial system.
The Bank of England overnight raised borrowing costs for the 11th time in a row after a nasty inflation surprise, but said the resurgence would probably fade fast, prompting speculation it had ended its run of hikes.
The Swiss National Bank also jacked up rates despite a torrid week following the takeover of Credit Suisse.
The yen climbed 0.5% to a fresh six-week high at 130.19 per dollar on Friday, extending its weekly gain to a solid 1.3%, while the euro recoiled from a seven-week high to $1.08325 but was up 1.6% for the week.
The U.S. dollar was headed for a heavy 1.3% weekly loss against its major peers at 102.53, not too far away from a seven-week trough of 101.91.
Oil prices fell on Friday, with U.S. crude easing 0.2 %at $69.8 a barrel, while Brent crude also skidded 0.2% at $75.74 per barrel.
Gold was slightly lower. Spot gold was traded at $1,992.78 per ounce, close to the highest level in a year.