Most Asian share markets followed S&P 500 futures lower on Thursday as speculation of faster hikes in U.S interest rates soured risk appetite globally.
The dollar held onto most of its overnight gains courtesy of higher Treasury yields, though the sudden shift to safety also spurred demand for the Japanese yen.
E-Mini futures for the S&P 500 ESc1 lost 0.3 percent and FTSE futures FFIc1 slid 0.8 percent.
MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS eased 0.8 percent, with most of the region in the red.
Chinese markets were in a better mood, returning from their long holiday break with a gain of 2 percent for the Shanghai blue-chip index .CSI300.
The retreat came after minutes of the Federal Reserve’s last policy meeting showed the usual concerns that inflation might disappoint, but also an expectation of faster economic growth due to fiscal stimulus.
In particular, members agreed that “the strengthening in the near-term economic outlook increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate.”
That led investors to narrow the odds on faster hikes with a host of Fed fund futures <0#FF:> hitting contract lows. Three rate rises are now almost fully priced in for this year, compared to two as recently as December.
“Participants saw a more favorable outlook as supporting gradual rate hikes,” noted Barclays analyst Michael Gapen.
“Since then, more stimulus has arrived and there is some tentative, though not conclusive, evidence of stronger wage and inflation data,” he added. “We continue to expect four rate hikes in 2018 and 2019.”
THE THREE PCT BARRIER
That risk was not welcome in the Treasury market, where yields on 10-year notes touched their highest in four years, and those on two-year paper the highest in nine.
Yields on 10-year debt US10YT=TWEB were last trading at 2.94 percent and creeping ever closer to 3 percent – a huge psychological milestone for bulls and bears alike.
For once, the lift in yields seemed to benefit the U.S. dollar which edged up to 90.123 .DXY against a basket of currencies after having rallied 0.3 percent overnight.
The euro slipped to $1.2274 EUR=, from a $1.2359 top on Wednesday and looked in danger of testing its February trough at $1.2204.
The next hurdle will be minutes from the European Central Bank’s last meeting with markets wary in case there is more talk of an eventual winding back on stimulus.
The dollar fared less well on the yen as the Japanese currency caught a safe-haven bid, falling back to 107.32 JPY= from an early 107.68.
The euro skidded to its lowest on the yen in three months at 131.57 EURJPY= and risked cracking major support at its 200-day moving average of 131.12.
Higher bond yields were a deadweight on gold, which pays no return, and left the metal stuck at $1,323.88 an ounce XAU=.
In oil markets, U.S. crude futures CLc1 fell 61 cents to $61.06 a barrel, while Brent LCOc1 lost 48 cents to trade at $64.94.