Asian stocks dropped and the US dollar held its gains after hawkish comments from Federal Reserve chair Kevin Warsh strengthened bets on an interest rate hike in September. The Kospi Index, a key barometer for the market, fell 1.6% as technology shares led losses.
The MSCI’s Asia Pacific equities gauge fell as much as 1% before paring its decline to 0.6%, with chipmakers Samsung Electronics and SK Hynix among the decliners.
US stock-index futures also retreated, with the S&P 500 futures falling 0.3% as at 9:45 am Tokyo time. The Hang Seng futures fell 0.2%, Nikkei 225 futures fell 1.7%, Japan’s Topix fell 0.7%, and Australia’s S&P/ASX 200 was little changed.
The US dollar traded in a narrow range against major peers after posting its biggest gain in about a month on Friday following Warsh’s remarks.
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Brent crude climbed 1.4% to $89.30 a barrel after the US military struck Iranian rocket launchers that were preparing to send mines into the Strait of Hormuz, ending weeks of relative calm. This escalation in Middle East tensions drove oil higher, raising the risk of another bout of price pressures.
The US attack was the first military action against Iran in more than a month, as US President Donald Trump has switched to a campaign to drive Iran to the negotiating table by squeezing its economy.
Traders will be alert to stronger rhetoric from Japanese officials after the currency weakened on Friday. The recent intervention has “curbed yen depreciation pressures to some degree, signalling that a move well above 160 is unlikely to be tolerated,” Barclays strategists wrote in a note to clients.
Traders have piled into bets that a quarter-point rate hike in September is more likely than not, and will tighten policy at least once more over the coming year, according to swaps data. In his first major speech since taking the helm of the central bank, Warsh warned inflation is not meaningfully slowing and said policymakers must be confident it is, otherwise the Fed has “work to do”.
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The market took a hawkish message away from Fed chair Warsh at his Jackson Hole speech, according to Marc Chandler, chief market strategist at Bannockburn Capital Markets.
The yen hovered around 160 per US dollar after hitting its weakest level in a month. Gold steadied around $4,460 an ounce after last week’s sell-off, as higher interest rates tend to diminish the appeal of the non-yielding metal.
“Asian market will be in a defensive mode to start the week today,” said Nick Twidale, chief market analyst at AT Global Markets. “The combination of a sharp escalation in Fed rate hike expectations after Kevin Warsh’s speech on Friday and renewed US strikes in the Strait of Hormuz will have investors on full alert.”