Hang Seng Retreats As Fed Chair Choice Raises Rate Hike Fear

Hong Kong shares dropped sharply on Tuesday with its tech firms leading the retreat as investors sensed that the nomination of Jerome Powell for a second term as chairman of the US Federal Reserve is a signal that interest rate hikes are on their way.

After Wall Street turned back on Monday, Asian shares dropped and European stocks opened in the red. Futures on Wall Street also pointed to a second day of losses in the United States though the dollar held on to recent gains on Tuesday.

MSCI’s gauge of Asia Pacific stocks outside Japan fell 0.43%, while the Hang Seng Index slipped 1.20%, or 299.76 points, to 24,651.58.

The Shanghai Composite Index rose 0.20%, or 7.01 points, to 3,589.09, while the Shenzhen Composite Index on China’s second exchange edged up 0.21%, or 5.21 points, to 2,520.37.

There were also losses in Singapore, Seoul, Taipei, Mumbai and Jakarta, though Sydney, Shanghai, Wellington, Bangkok and Manila edged up. Markets in Japan were closed for a public holiday.

US President Joe Biden tapped Powell to continue as Fed chairman on Monday, with Lael Brainard, the other top candidate for the job, as vice-chairman. The news initially buoyed Wall Street stocks, before the market pulled back into the afternoon with the S&P 500 and Nasdaq Composite closing down from all-time highs.

The sense that a second term under Powell could add to policymakers’ desire to curb rising inflationary forces also sent investors buying dollars.

The greenback, measured against a basket of currencies, rose to a new 16-month high and pushed the euro further below $1.13 to $1.1226, the weakest level for the single currency since July 2020. By 0900 GMT the euro had come off those lows.

“On the one hand, US President Joe Biden’s decision to confirm Jerome Powell as Fed chair is generally seen as more positive for the greenback as Powell is considered less dovish than Lael Brainard,” UniCredit strategists said. “On the other hand, the fact that current Covid-19 developments are primarily affecting the eurozone represent another drag on the common currency.”

Treasury Yields Advance

US Treasury yields were led higher by two-year notes, which typically move in step with interest rate expectations. Those yields hit their highest level since early March 2020 and were last trading at 0.638%.

“The market is expecting higher probabilities of rate hike next year,” said Edison Pun, a senior market analyst at Saxo Markets, pointing to expectations as high as for three or four rate rises next year.

Adding to the gloomy mood were new concerns about Covid-19 cases. Riskier assets have been shaken in recent sessions by surging Covid-19 cases in Europe and renewed curbs, dousing investor hopes of a quicker recovery in consumption and growth worldwide.

In commodities, spot gold dropped 0.19% to $1,801 an ounce. Gold prices were under pressure as Powell’s nomination drove expectations that the central bank will stay the course on tapering economic support.

Oil prices were in the red again after a short rebound the previous day from recent losses on reports that OPEC+ could adjust plans to raise oil production if large consuming countries release crude from their reserves or if the coronavirus pandemic dampens demand.

Brent crude weakened 1.28% at $78.70 a barrel and US crude dropped 1.63% to $75.48 per barrel.

MARKETS

Hong Kong > Hang Seng Index: DOWN 1.2%at 24,651.58 (close)

Shanghai > Composite: UP 0.2% at 3,589.09 (close)

Tokyo > Nikkei 225: Closed for a holiday

New York > Dow: UP less than 0.1% at 35,619.25 (close)