Volkswacht Bodensee - Markets fall on rate concerns

Despite falling sharply over the last 12 months, US inflation remains stubbornly above the Federal Reserve's long-term target of two percent, leading most Fed officials to predict last month that another hike is needed this year.

Federal Reserve Vice Chair for Supervision Michael Barr told a conference in New York on Monday that he expected rates would need to remain at a "sufficiently restrictive level" for "some time" to rein in inflation.

Barr's comments echo the views of the majority of his colleagues, who recently lowered the number of rate cuts they expect in 2024, suggesting a longer period of high rates.

The Fed has raised its key lending rate 11 times since March 2022, lifting to a 22-year high.

With inflation well above its target, "the Fed is gonna keep rates high and we are expecting higher rates for longer", Xi Qiao, managing director for wealth management at UBS, told Bloomberg Television.

"That could be good for the US dollar, but more caution on the equity markets."

Wall Street ended mixed following a congressional deal to avert an immediate US government shutdown, with traders fuelling a bond market selloff.

"Any 'relief rally' from the US government spending deal appears to have been short-lived as bond markets witnessed a deepening selloff, leading to rising yields across the curve," said SPI Asset Management's Stephen Innes.

Treasury yields remained lofty with the yield on the 10-year US Treasury reaching the highest level since 2007 while the 30-year bond yield was at its highest since 2010.

Treasury bond yields are seen as a proxy for US interest rates and closely watched.

"This yield surge reflects the market's response to messaging from the Federal Reserve, indicating the central bank's commitment to keeping borrowing costs elevated to combat inflation," said Innes.

"The global bond market selloff has gained momentum, partly driven by the reprieve from a US government shutdown," he added.

Hong Kong led the equities decline in Asia on Tuesday, falling nearly three percent as the market reopened following a holiday weekend.

Going against the flow, heavily indebted Chinese property giant Evergrande saw its stock jump as it resumed trading in Hong Kong days after it announced its boss was under criminal investigation.

Tokyo ended down 1.6 percent while Sydney, Taipei, Bangkok and Singapore were also well in the red. Jakarta and Manila were flat while Kuala Lumpur was the sole gainer.

Markets in mainland China and South Korea were closed for holidays.

The retreat continued in Europe, with London, Frankfurt and Paris all down at the open.

On forex markets, the yen was hovering close to the psychological 150 to the dollar level.

The yen's weakness is fuelling speculation that the government may step in to prop up the currency, which has been hammered by the Bank of Japan's refusal to move away from its ultra-loose monetary policy even as the Fed considers lifting interest rates further.

- Key figures around 0715 GMT -

Tokyo - Nikkei 225: DOWN 1.6 percent at 31,237.94 (close)

Hong Kong - Hang Seng Index: DOWN 2.9 percent at 17,285.71

Shanghai - Composite: Closed for a holiday

London - FTSE 100: DOWN 0.1 percent at 7,503.20 points

Euro/dollar: DOWN at $1.0477 from $1.0484 Monday

Pound/dollar: DOWN at $1.2080 from $1.2094

Euro/pound: UP at 86.73 pence from 86.66 pence

Dollar/yen: DOWN at 149.70 yen from 149.84 yen

Brent North Sea crude: DOWN 0.3 percent at $90.41 per barrel

West Texas Intermediate: DOWN 0.2 percent at $88.62 per barrel

New York - Dow: DOWN 0.2 percent at 33,433.35 points (close)

P.Keller--VB