War and prospect of rate hikes hoist dollar, gilt wipeout hits Treasuries

HONG KONG, Oct 11 (Reuters) – Asian stock markets fell and the dollar rose on Tuesday with investors worried about rising interest rates and an escalation in the Ukraine war, while Treasury yields leapt as a collapse in British gilts unnerved global bond markets.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.8% to a two-year low, led by a deepening slide for chipmakers and China tech stocks in the wake of US export curbs aimed at hurting Chinese technology development.

Taiwan’s Semiconductor Manufacturing Co slumped 8%.

The fall was a catch-up to declines in US stocks on Monday, especially falls in the U.S. semiconductor index, when the Taiwan market was on holiday, said Tsai Ming-han, Cathay Futures Consultant Co analyst.

Japan’s Renesas skidded 5.66% and South Korean firm Samsung fell 1.42%. An index measuring China’s semiconductor firms dropped another 1.91% on Tuesday.

Japan’s Nikkei dropped 2.7%. The risk-sensitive Australian and New Zealand dollars hit 2-1/2 year lows.

“Risk aversion has dominated,” said National Australia Bank currency strategist Rodrigo Catril, as renewed Russian attacks on Ukrainian cities and global recession fears worried markets.

“Sentiment has also not been helped by a big core global bond sell off led by UK gilts, notwithstanding a flurry of announcements designed to calm UK debt markets.”

E-mini futures for the S&P 500 fell 0.5%, while EURO STOXX 50 Index Futures were down 0.45%.

GILTS ROUT

Bonds globally have been sideswiped by the rout in gilts, amid fears pension funds were forced into fire sales and British promises of more tax details and extra emergency measures.

The Bank of England (BOE) on Tuesday expanded its emergency bond purchase programme to include inflation-linked gilts.

The purchase, each up to 5 billion pounds (USD 5.51 billion), will act as backstop to restore orderly market conditions, the central bank said.

Treasury yields jumped when trading resumed after Monday’s US holiday, with 30-year yields up as much as 11 basis points to an almost nine-year high of 3.959% on Tuesday.

On the fresh call of BOE, yield of the 30-year note fell back to 3.9455% at 0622 GMT.

The backdrop of the bond market rout is ever higher interest rates. Nerves are fraying ahead of Thursday’s release of US inflation data which could set the stage for another big hike from the Federal Reserve in November.

“Inflation is stubborn, and the Fed needs to go beyond, above beyond what the market is expecting,” said Tai Hui, chief Asia-Pacific market strategist at J.P. Morgan Asset Management.

Futures pricing shows traders are positioned for about a 90% chance of a 75 basis point Fed hike next month and for the Fed funds rate to hit 4.5% by February and stay there most of 2023.

That outlook is giving dollar bulls another run and has the greenback drifting toward the milestone highs it scaled last month.

The Aussie made a 2-1/2 year low of $0.6261 in the Asia session and the kiwi a low of USD 0.555.

The euro fell 0.19% to USD 0.9683 and was drifting back toward September’s 20-year low of USD 0.9528. Sterling was under pressure and down 0.33% at USD 1.1023.

The Japanese yen, at 145.78 per dollar, was within a few pips of the level that prompted official support a couple of weeks ago.

Brent crude fell marginally to USD 95.85 a barrel. Spot gold fell 0.07% to USD 1,666 an ounce.

(USD 1 = 0.9069 pounds)

(Reporting by Selena Li in Hong Kong; Additional reporting by Emily Chan in Taipei; Editing by Tom Westbrook, Simon Cameron-Moore and Andrew Cawthorne)