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Asian shares fall as Fed hike relief rally fizzles

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SHANGHAI : Asian stocks stumbled and the dollar regained its footing on Thursday as investors continued to digest the impact of surging inflation and an aggressive policy tightening outlook from global central banks.

Stock futures in Europe pointed to a slightly higher open, with pan-region Euro Stoxx 50 futures and German DAX futures up about 0.4 per cent a day after the European Central Bank promised fresh support to temper a bond market rout.

FTSE futures were down 0.1 per cent ahead of an expected rate rise by the Bank of England aimed at tackling inflation.

In Asia, the turn lower in shares came after the U.S. Federal Reserve on Wednesday approved its biggest interest rate hike since 1994, lifting the target federal funds rate by 75 basis points to a range of between 1.5 per cent and 1.75 per cent. Fed officials also see further steady rises this year, targeting a federal funds rate of 3.4 per cent by year-end.

While equity investors initially cheered the widely expected move, rising unease over the course of the trading day ate away at gains.

Fed projections showed U.S. economic growth slowing to a below-trend rate of 1.7 per cent, and policymakers expect to cut interest rates in 2024.

“The thing that I keep reminding myself and others is that they’re terrible at forecasting, haven’t got a clue where the economy is going,” said Rob Carnell, head of research and chief economist for Asia-Pacific at ING.

“So we really should take no comfort at all in these forecasts that GDP growth is going to be 1.7 per cent this year and next year … when their economy has until very recently been going like a train.”

Data on Friday showed a sharper-than-expected rise in U.S. inflation in May, alongside a University of Michigan survey showing consumers’ five-year inflation expectations jumping sharply to their highest since June 2008.

In a news conference following the Fed’s latest two-day policy meeting, Fed Chair Jerome Powell said that the survey was “quite eye-catching”.

“(Inflation expectations) are starting to look like they’re too high. That I think is one reason why Powell wanted to do a 75 … And I think they will also go again in July,” said Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

“They’ve got to get inflation down. They’re so far behind the curve it’s not funny.”

MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.46 per cent lower in afternoon trade, erasing earlier gains. Australian shares slipped 0.20 per cent and Chinese blue-chips fell 0.62 per cent. Hong Kong’s Hang Seng fell 1.31 per cent.

In Tokyo, the Nikkei trimmed earlier gains of as much as 2.38 per cent, and was last 0.40 per cent higher.

ROOM TO RISE

After retreating from a 20-year peak following the Fed meeting, the dollar regained its footing in the Asian session.

“It looked like a classic case of ‘buy the rumour, sell the fact’ as the dollar sold off and Wall Street rallied,” said Matt Simpson, senior market analyst at CityIndex. “(But) given the trajectory for Fed hikes … we very much doubt the top is in place for the U.S. dollar.”

The global dollar index, which tracks the greenback against a basket of six peers, was last up 0.27 per cent at 105.08, with the dollar jumping to 134.34 against the yen.

The euro edged down 0.15 per cent to $1.0427.

U.S. Treasury yields also took a turn lower, reflecting rising risk aversion, with the 10-year yield slipping to 3.3068 per cent from a close of 3.3950 per cent on Wednesday.

The two-year yield fell to 3.2525 per cent from a close of 3.2790 per cent on Wednesday.

In commodity markets, oil prices recovered from a steep drop as investors focused on tight supplies. Brent crude was last up 0.27 per cent to $118.83 per barrel and U.S. crude added 0.49 per cent to $115.88.

Gold was slightly lower as the dollar firmed. Spot gold last traded at $1,831.26 per ounce, down 0.12 per cent on the day.

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