Cold reality of “higher for longer” sets in

June 29 (Reuters) – The cold reality of ‘higher for longer’ interest rates that cooled investor sentiment on Wednesday will lend a cautious tone to Asian trading on Thursday, with investors also wary of potential action from Tokyo and Beijing on exchange rates.

On the regional data front retail sales and consumer confidence from Japan and Australian retail sales take center stage, while investors with exposure to Vietnam will be paying close attention to second-quarter GDP growth figures from Hanoi.

The broader narrative running through markets on Wednesday was more downbeat than Tuesday – and less coherent – after the leaders of the G4 central banks sent hawkish signals from the European Central Bank’s annual jamboree in Sintra, Portugal.

Wall Street struggled under the weight of rising US rate expectations, the dollar rose and Treasuries rallied, and the US yield curve inversion deepened a bit. So far, so ‘risk off’.

But US equity market volatility fell, oil jumped, Apple shares climbed to a new all-time high, and other mega tech stocks rose too.

Asian tech may rise in sympathy on Thursday, but the sector is one of the major sources of US-Sino tensions – US officials are considering tightening an export control rule designed to slow the flow of artificial intelligence chips to China by clamping down on the amount of computing power the chips can have.

On the macro front, another plunge in Chinese industrial profits was yet another reminder of the difficulties the world’s second-largest economy is experiencing.

Annual profits at China’s industrial firms extended a double-digit decline in the first five months as softening demand squeezed margins.

The economy appears to be losing steam on many fronts. Further monetary easing could be in the cards and if it is, the yuan is likely to inch closer to a fresh 15-and-a-half-year low through 7.30 per dollar.

Investors are wondering exactly where Beijing stands on the yuan right now, after acting to support the currency for the first time in nearly eight months on Tuesday, then allowing it to slide again on Wednesday.

The yen, meanwhile, fell to a new seven-month low on Wednesday near 145.00 per dollar. Many analysts say yen-buying intervention from Japanese authorities between 145.00 and 150.00 per dollar is increasingly likely.

Both the yuan and the yen are historically weak. If one declines, authorities in the other country could be minded to let their currency slide too.

Here are key developments that could provide more direction to markets on Thursday:

– Japan retail sales and consumer confidence (May)

– Australia retail sales (May)

– Vietnam GDP (Q2)

(By Jamie McGeever)