Asia stocks, bonds struggle as Fed flags more hikes

By Wayne Cole and Hideyuki Sano

SYDNEY/TOKYO (Reuters) - Asian shares and currencies struggled on Thursday after the Federal Reserve raised rates for the first time in a year and hinted at the risk of a faster pace of tightening than investors were positioned for.

Yields on short-term U.S. debt surged to the highest since 2009, sending the dollar to peaks not seen in almost 14 years.

Wall Street suffered its biggest percentage decline since before the Nov. 8 U.S. presidential election, though the loss was slight compared with gains of the last month or so.

The Fed's rate rise of 25 basis points to 0.5-0.75 percent was well flagged but investors were spooked when the "dot plots" of members' projections showed a median of three hikes next year, up from two previously.

 

Some analysts note that the change came even as the Fed's economic projections have hardly been upgraded, suggesting the Fed could accelerate tightening even further if policymakers see firmer evidence of higher growth or inflation.

"The U.S. economy is already on a solid expansion but the new administration wants to do large-scale spending. That could surely boost inflation and U.S. bond yields," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

Investors had bet heavily on a more dovish message and many positions were quickly unwound.

"The fact that the market, including me, was leaning the wrong away exacerbated the move," said Steven Englander, Citi's global head of forex based in New York.

Fed fund futures <0#FF:> slid to imply an almost 50 percent chance that the Fed will raise rates three times, with two hikes fully priced in already.

Yields on two-year Treasury paper > jumped 10 basis points to 1.27 percent, the biggest daily increase since early 2015 and the highest level since August 2009.

EMERGING PRESSURE

It also took the premium that U.S. Treasuries pay over German two-year debt > to its fattest since 2000.

That jump could suck more funds out of emerging markets and will be taken badly by stocks and currencies across Asia.

The U.S. dollar was already up across the board, hitting a near 14-year peak against a basket of currencies at 102.100 <.DXY>. The euro skidded 0.9 percent to $1.0528 >, while the dollar climbed 1.6 percent on the yen to 117.02 >.

The drop in the yen could cushion Japanese stocks, lifting Japan's Nikkei <.N225> 0.9 percent.

Other Asian markets had less luck, with MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> dropping 0.7 percent.

Some attention would be on the Chinese yuan with the risk that a sharply lower opening fix could add to pressure for a competitive depreciation from other Asian currencies.

On Wall Street, the Dow <.DJI> ended Wednesday down 0.6 percent, while the S&P 500 <.SPX> lost 0.81 percent and the Nasdaq <.IXIC> 0.5 percent.

Stocks have been on a tear in recent weeks on speculation the incoming Trump Administration will pursue tax cuts and increase infrastructure spending.

The rising dollar slugged oil prices, already smarting from concerns about oversupply.

Brent crude futures dropped 3.3 percent on Wednesday to $53.72 per barrel, while U.S. crude was quoted at $50.87 per barrel, having slipped 6.7 percent from its near 1 1/2-year peak hit on Monday.

Gold dropped to its lowest in more than 10 months around $1,142.66 an ounce >.

(Reporting by Wayne Cole and Hideyuki Sano; Editing by Andrew Hay and Eric Meijer)