No let up from dollar, US yield squeeze

A sea of red across most equity markets and no end in sight to the rise in the dollar and US bond yields is the backdrop to what is likely to be another nervy session in Asia on Tuesday.

As if that wasn’t reason enough for investors to keep their guard up, US CPI inflation data will be released the following day, when the fourth quarter US earnings season kicks off too.

The S&P 500’s fall on Monday at one point wiped out all the index’s post-US election gains. Although it managed to close off those lows, there is no doubt that high and rising US bond yields continue to weigh heavily on wider equity market sentiment.

The global backdrop isn’t helping either, amid swirling trade tensions and uncertainty surrounding the new incoming US administration ahead of Donald Trump’s inauguration next week.

On that front, the Biden administration’s announcement on Monday of new US export restrictions on artificial intelligence chips will only deepen the unease.

The new regulations, among the toughest yet from Washington and designed to limit the global distribution of these coveted processors, could deal a significant blow to the earnings of AI and tech firms, including Nvidia.

The dollar on Monday rose to a fresh 26-month high, a further tightening of financial conditions that will be felt in domestic US markets but especially in overseas asset prices.

Analysts at Goldman Sachs on Friday raised their dollar forecasts to include the euro falling below parity with the dollar within the next three to six months. With the euro slipping below USD 1.02 on Monday it wouldn’t be a shock if the parity break comes in the next six weeks.

The dollar has started the week on a strong footing. It has risen 14 out of the last 15 weeks, a remarkable run that has seen it appreciate 10% against its major G10 rivals. Emerging and Asian economies continue to feel the squeeze from dollar and Treasury yields.

Tuesday’s calendar in Asia is light, with Australian consumer confidence, Indian factory gate inflation figures, and the latest Japanese trade and current account numbers the main events.

Japan’s yen remains under heavy selling pressure around 158 per dollar, close to the 160/dollar area that has previously prompted yen-buying intervention from Japanese authorities.

Policy decisions in Indonesia and South Korea, and a raft of Chinese economic indicators, should be the local catalysts for more market fireworks later in the week.

The annual Asian Financial Forum in Hong Kong continues. Speakers on Tuesday include the chairman of Alibaba, the managing director of China International Capital Corporation Limited, and CIOs at several major global investment funds.

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

– Japan trade, current account (November)

– India wholesale price inflation (December)

– Bank of Japan Deputy Governor Himino Ryozo speaks

(Reporting by Jamie McGeever; Editing by Deepa Babington)