Treasuries faced further declines following Federal Reserve Chair Jerome Powell’s indication of a delay in interest rate cuts beyond March. Concurrently, Chinese small-cap shares witnessed a slide amid persistent market uncertainties, despite official assurances. The Asian session saw US 10-year yields rising, spurred by robust payroll data, with Powell cautioning against premature moves.
The Treasury market extended its sell-off, prompted by Federal Reserve Chair Jerome Powell’s remarks hinting at a postponement of interest rate cuts beyond March. This development amplified market jitters, leading to a decline in Chinese small-cap shares, despite attempts at official intervention.
US 10-year yields surged by four basis points during the Asian trading session, following a substantial 14 basis point increase on Friday, driven by stronger-than-expected payroll data. Powell’s interview on CBS’s 60 Minutes, aired Sunday in the US, underscored the risk of premature policy actions, further unsettling investors.
The impact of Treasury declines reverberated across Asian bond markets, weighing particularly on government debt in Australia and New Zealand. However, Chinese government bonds stood as an exception, with 10-year yields registering a modest two basis point decrease.
China’s CSI 1000 small-cap index experienced a significant tumble of up to 8.7%, contrasting with the CSI 300 index, which narrowed its earlier losses to just 0.1%. This occurred despite reassurances from the China Securities Regulatory Commission, pledging to stabilize the market and channel more medium- and long-term funds into it.
Ken Wong, an Asian equity portfolio specialist at Eastspring Investments in Hong Kong, highlighted the pressure on medium and small-cap stocks, attributing it to investors’ expectations of greater support for large-cap stocks by government-related entities. He noted a popular trading strategy involving long positions in CSI 300 and short positions in CSI 500 and CSI 1000.
Additionally, benchmarks in Australia and South Korea saw declines, while US equity futures dipped following Friday’s record-breaking performance of the S&P 500 Index. Powell’s hawkish stance bolstered the dollar against major currencies, with the yen slipping to around 148 per dollar.
Investor sentiment regarding a rate cut by the Fed in March weakened substantially, plummeting to approximately 20% from nearly 40% on Thursday, reflecting the economy’s resilience and reducing expectations of imminent policy easing.
Despite the diminished likelihood of a March rate cut, some investors still anticipate multiple rate cuts throughout the year. However, analysts caution against excessive expectations, as Fed officials are likely to resist such aggressive monetary policy moves.
The Treasury market’s continued sell-off, fueled by Powell’s remarks, underscores the prevailing market uncertainties. Despite efforts to stabilize markets, the impact on Chinese small-cap shares highlights lingering apprehensions. As markets navigate through volatile conditions, investors remain attentive to evolving economic indicators and central bank policies.
