Marketmind: Dodging the US curve ball

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.

Investors in Asia may well have one aim in mind Friday – get through the day unscathed and close out what has perhaps been the first proper ‘risk off’ week since the U.S. regional banking shock in March.

The creeping rise in volatility and heavy selling this week can be blamed on a few factors, like Japan’s surprise policy shift and Fitch’s shock U.S. credit rating downgrade, but one culprit is emerging above all others – the U.S. yield curve.

The long end of the U.S. Treasury curve is getting crushed, triggering a surge in long-dated yields and ‘steepening’ of the curve. The rapid moves are unnerving investors and come just as many stock markets are at or near historical highs.

The Asian economic data and corporate events calendar on Friday is light, with only Philippines inflation and Singapore retail sales on tap, leaving regional markets beholden to global risk sentiment.

After-the-bell earnings on Thursday from Apple and Amazon could soothe investors’ nerves on Friday ahead of the latest U.S. employment report later in the day. Overall, the two tech giants reported fairly strong results and bullish outlooks.

But right now, it’s all about the U.S. yield curve.

The 2s/10s curve is around 22 basis points steeper this week. Excluding the U.S. regional banking sector shock in March, that would be the biggest weekly steepening since April last year, bigger than anything around the pandemic, and one of the biggest in well over a decade.

The 10-year and 30-year yields are at their highest levels since November, comfortably above 4.0%, and the latter is on track for its biggest weekly rise this year.

The S&P 500 is having its worst week since March, down 1.7% and only its third down week in 12, and the MSCI World index is on a similar track, already down more than 2% on the week.

Global currency market and S&P 500 equity volatility are the highest in two months, and implied volatility in dollar/yen trading is registering its steepest weekly rise since March.

Asian stocks ex-Japan have underperformed this year, so the week isn’t looking quite so alarming. Still, the MSCI Asia ex-Japan index is down 2.5%, wiping out all the previous week’s gains and poised to register its worst week in six.

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

– Philippines CPI inflation (July)

– Singapore retail sales (June)

– U.S. non-farm payrolls, unemployment (July)

(By Jamie McGeever; Editing by Deepa Babington)