Stocks in Asia declined on Wednesday as investors weigh prospect of rapid reduction on Federal Reserves’ balance sheet as part of monetary tightening to tame inflation.
Equities in Mainland China and Hong Kong sharply dropped after returning back from holiday while South Korea and Japan dragged down over 1%. The MSCI Broad Market Index ex Japan gained marginally by 0.11%.
U.S. Treasuries extended loss with the 10-year yield up to 2.60%, marking the highest level since 2019. A gauge of the dollar’s strength was near a three-week peak.
Fed Governor Lael Brainard said Tuesday curbing inflation is “paramount,” adding the central bank may start trimming its balance sheet rapidly as soon as May.
Brainard comments directs attention to the Fed’s meeting miniatures due later on Wednesday, which is expected to give clues about about the pace of both interest-rate hikes and so-called quantitative tightening.
The market is anticipating half-point Fed rate increase during the next policy meeting on May.
Investors are concerned that a hawkish Fed could eventually lead to a economic downturn or even a recession.
“The key risk for Wall Street-correlated world stock markets remains the Federal Reserve tightening cycle,” Christopher Wood, global head of equity strategy at Jefferies LLC, wrote in a note.
Quantitative tightening alongside rate rises may have a more rapid impact given current debt levels, he said.
Crude oil extended loss as worries about fresh sanctions mulls, including a U.S. ban on investment in the country and a European Union proscription on coal imports. The WTI is trading around $101 a barrel while the Brent is trading around $106 a barrel.