HONG KONG: Equities fell in Asia on Thursday as traders grow increasingly worried that central bank moves to rein in inflation could tip economies into recession.
However, price pressures were eased by a drop in crude following a report saying Saudi Arabia had indicated it was willing to pump more if Russia was unable to fulfil pledges to boost production.
Having enjoyed a healthy start to the week, markets are again on the back foot owing to bank policymakers' plans to tighten their belts to prevent inflation running out of control.
The Bank of Canada ramped up its key lending rate by half a percentage point Wednesday and warned of further tough measures down the line as energy and food costs spike.
The move came as several top Federal Reserve officials said they were in favour of similar increases in the United States. Wednesday also saw the central bank begin to offload its vast bond holdings that were bought as part of its quantitative easing programme to bring rates down to near zero.
Now observers fear that the increasingly hawkish moves by finance heads — combined with China's lockdown-induced weakness and the Ukraine war — will cause economies to contract.
"We do see the rise in probability of a recession in the second half of this year, potentially persisting into 2023 as the Fed continues to battle inflation," Tracie McMillion, of Wells Fargo Investment Institute, told Bloomberg Television.
She added that traders may not have completely taken into account the Fed's balance sheet reduction.
"The impact of quantitative tightening starting to roll off the Fed's balance sheet this month is really untested and unprecedented. Our guess is that it's probably not fully priced into markets," she said.
After a weak lead from Wall Street, Asia was mostly in negative territory. Hong Kong shed more than 1%, while Tokyo, Sydney, Seoul, Singapore, Wellington, Manila, Jakara and Taipei were also well down. Shanghai and Mumbai edged up.
Frankfurt and Paris opened higher. London was closed for a holiday.
Concern over the outlook was shared by Wall Street titan Jamie Dimon, who warned that the wave of unprecedented crises were combining to cause an economic superstorm.
"That hurricane is right out there down the road coming our way," the JPMorgan Chase & Co boss said. "We don't know if it's a minor one or Superstorm Sandy. You better brace yourself."
However, in sign of the huge uncertainty coursing through markets, a top strategist at the bank, Marko Kolanovic, painted a more positive picture, forecasting a market recovery through 2022.
"We remain positive on risky assets due to near record-low positioning, bearish sentiment, and our view that there will be no recession given support from US consumers, global post-COVID reopening, and China stimulus and recovery," he wrote in a note.
There was some relief for those concerned about inflation as oil sank more than 2% on a Financial Times report that Saudi Arabia was considering a plan to boost output as Russia struggles to meet targets owing to Ukraine war-linked sanctions.
The bans imposed on Moscow have sent crude soaring this year, just as demand picks up owing to the reopening of economies but Riyadh has ignored previous calls to pump more. But with supplies increasingly strained, the OPEC linchpin could be coming round.
"This will be well received by Western leaders given inflation — and inflation expectations — remain eye-wateringly high, and central banks try to raise rates at the risk of tipping their economies into a recession," said Matt Simpson of StoneX Financial.
"More supply essentially soothes some of those inflationary fears, even if there is a lot more work to do when it comes to fighting inflation."
The FT report follows a Wall Street Journal article saying OPEC was considering removing Russia from an agreement that has locked producers into limited output increases, which analysts said could lead to an early end of the pact and allow nations to open the taps more.
OPEC is due to hold its monthly meeting Thursday to discuss output, though it is considered unlikely the group will make any changes yet.
Tokyo - Nikkei 225: DOWN 0.2% at 21,413.88 (close)
Hong Kong - Hang Seng Index: DOWN 1.1% at 21,053.07
Shanghai - Composite: UP 0.4% at 3,195.46 (close)
Euro/dollar: UP at $1.0672 from $1.0658 on Wednesday
Pound/dollar: UP at $1.2510 from $1.2492
Euro/pound: UP at 85.32 pence from 85.25 pence
Dollar/yen: DOWN at 129.90 yen from 130.15 yen
Brent North Sea crude: DOWN 1.6% at $114.39 per barrel
West Texas Intermediate: DOWN 1.8% at $113.17 per barrel
New York - Dow: DOWN 0.5% at 32,813.23 (close)
London - FTSE 100: Closed for a holiday
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