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SYDNEY, Aug 19 (Reuters) – Asian stocks were left in limbo on Friday as the U.S. dollar rode all the way as the clouds of recession gathered over Europe and set highlights the relative outperformance of the US economy.
Fresh concerns over the health of the Chinese economy saw MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) slip 0.3%, falling 1.1% on the week.
Chinese blue chips (.CSI300) were flat, while South Korea (.KS11) lost 0.5%. The Japanese Nikkei (.N225) fared better with a 0.3% gain due in part to a further decline in the yen.
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S&P 500 futures fell 0.1% and were little changed during the week, having repeatedly failed to break above the 200-day moving average, while Nasdaq futures slipped 0. .2%.
EUROSTOXX 50 futures fell 0.1%, while FTSE futures edged up 0.2%.
The threat of higher borrowing costs loomed in the markets as no less than four US Federal Reserve officials signaled that there was still work to be done on interest rates, the only difference being the speed and the level to be reached. Read more
Markets are leaning towards a half-point upside in September and a one-in-three chance of 75 basis points (bps). Rates peak at at least 3.5%, although some Fed members are arguing for 4% or more.
“There is no sign that the labor market or inflation data is slowing enough for the Fed to declare victory on inflation,” said Brian Martin, G3 chief economics officer at ANZ.
“We see upside risks to the Fed’s inflation projections, and we expect those and the dot plot to be revised upwards in September,” he added. “We have revised our year-end federal funds rate forecast up 25 basis points to 4.0% and now expect three 50 basis point hikes over the remainder of 2022.”
All of this underscores the importance of Fed Chairman Jerome Powell’s August 26 speech in Jackson Hole, usually a major event in the calendar of central banks.
The bond market is clearly on the hawkish side with two-year yields 34 basis points below the 10-year yield and flashing recession warnings.
DOLLAR IN DEMAND
The “R” alarm is also sounding across Europe where natural gas prices hit record highs on Thursday, adding to an inflationary impulse that is sure to lead to more painful policy tightening, heightening the risk of a recession.
With EU core inflation three percentage points above the European Central Bank’s 2% target, markets are betting on another half-point rate hike in September . Read more
The gloomy economic outlook has seen the euro fall almost 1.7% so far this week to $1.0078 and retrace towards its July nadir at $0.9950.
The dollar also gained 2.0% against the yen this week to hit 136.28, its highest since late July. Against a basket of currencies, it was up 1.8% for the week at 107.60.
The British pound was another victim, losing 1.8% for the week to $1.1917. Investors fear that inflation in Britain at a stratospheric 10.1% could lead the Bank of England (BoE) to continue to rise and force a recession.
The cost of living crisis saw British consumer sentiment plunge to its lowest level on record in August, according to a monthly survey by data provider Gfk. Read more
“The strength of the wage and price data has raised the bar for inaction and we now believe the BoE will need to see clearer signs of a hard landing in order to pause,” JPMorgan analysts said. who raised their rate forecast by 75 basis points to 3%.
“We expect a two-quarter recession from the 4th quarter which will result in a cumulative decline of 0.8% in GDP.”
The rising dollar has been a headwind for gold which is down 2.4% on the week so far at $1,758 an ounce.
Oil prices were a little more stable on Friday, but still down on the week, with Brent hitting its lowest since February at one point on demand concerns.
Brent rose slightly 2 cents to $96.61, while U.S. crude rose 5 cents to $90.55 a barrel.
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Reporting by Wayne Cole; Editing by Christopher Cushing
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