Stalemate at the Fed on Interest Rates: Global Markets in Turmoil. What’s Going On?

Asian Stocks and Currencies Decline Following Wall Street Sell-Off

Asian stocks and currencies are slipping in the red after a sell-off on Wall Street, driven by still strong economic activity data, signaling that the Fed may keep rates unchanged for much of this year.

The MSCI Asia Pacific Index is heading towards its worst day since May 8, and is set to record the first drop in five weeks, with stock plunges from Hong Kong to mainland China, Japan, and Australia.
The Hong Kong Chinese stock index is on track for the worst week since January.
U.S.
futures rise after Thursday’s S&P 500 index saw its biggest drop this month.

Risk Aversion and Market Outlook

The day seems to be characterized by risk aversion.
This is due to the U.S., where positive economic indicators translate into negative news for the Fed dealing with stubborn inflation.
Investors now see a rate cut in December.

Recent data has shown a decrease in U.S.
unemployment claims, while the S&P Global Flash PMI survey has highlighted that business activity grew faster than expected by economists in May.

Economic robust results along with the minutes of the Fed’s latest meeting earlier this week have led traders to scale back their bets on rate cuts this year.

Market Reactions and USD Strength

Amid changing expectations on U.S.
rates, yields have increased, with the yield on the U.S.
10-year benchmark reaching a peak of 4.498% on Thursday.

The dollar has also benefited, with the greenback index, which measures the U.S.
currency against a basket of six major currencies, rising by almost 0.6% for the week to 105.09, on track for the biggest weekly gain since mid-April.
Emerging Asian currencies, including the South Korean won, the Malaysian ringgit, and the Thai baht, have declined following the dollar’s strengthening.

Investors and traders hoping for a rate cut have become hypersensitive to every key economic data, making rate cut expectations highly volatile according to Vasu Menon, Chief Investment Strategy Officer at OCBC.
“The waiting game is likely to continue for a while as markets swing back and forth between U.S.
growth and inflation,” he added.

Geopolitical tensions in the background can only worsen sentiment.
Chinese stocks have also dropped as on Friday the Chinese army began its second day of war exercises around Taiwan.