Asian markets up but inflation fears keep traders in check

HONG KONG: Asian investors struggled to extend a global markets rally Wednesday as they continue to fret over the prospect of soaring inflation and a hike in interest rates as the global economy explodes out of the coronavirus crisis.

With Joe Biden's $1.9 trillion handout-rich stimulus on the cusp of being passed, focus on trading floors for weeks has been on the impact of an expected spending splurge by the government and pent-up Americans as they emerge from lockdowns with plenty of spare cash.

In reaction to that, benchmark 10-year Treasury yields have climbed in recent months to one-year highs as dealers sell up in expectation that higher inflation will eat into their returns.

This has fanned fears the Federal Reserve will have to begin winding back the ultra-loose monetary policies -- including record low interest rates -- that have been a key driver of the year-long equities rally.

Those worries were soothed Tuesday when a closely watched sale of new three-year US debt passed off without hitch -- helping push yields down -- though focus is now on the auctions of 10- and 30-year Treasuries Wednesday and Thursday. Weak demand for seven-year notes last week sparked a sharp sell-off across world markets.

The news provided a much-needed boost to Wall Street, where the tech-rich Nasdaq soared 3.7 percent, while the Dow and S&P 500 were also well in positive territory.

European markets also rose, with Frankfurt tapping a new record high.

But Asia fluctuated in early trade. Hong Kong, Shanghai and Seoul were slightly higher while Tokyo was barely moved. There were gains in Wellington, Taipei and Jakarta. But Sydney and Singapore fell into the red.

Stimulus edges closer

Tim Murray, a strategist at T Rowe Price, had a word of warning for investors.

"After remaining at low levels for several years, inflation expectations for the rest of 2021 have risen because of an anticipated release of pent?up consumer demand in the US and abroad," he said in a note.

"While the anticipated inflation rate is relatively modest, it is notable because expected inflation levels have not been this high since June 2014. In our view, US investors should not continue to expect the abnormally low levels of inflation seen over the past decade."

Expectations for the global economic recovery were further enhanced Tuesday when the Organisation for Economic Co-operation and Development sharply increased its growth outlook, including a more than doubling of its US output estimates for this year.

"Global economic prospects have improved markedly in recent months, helped by the gradual deployment of effective vaccines, announcements of additional fiscal support in some countries, and signs that economies are coping better with measures to suppress the virus," it said in a report.

Investors are now looking to Washington, where the House of Representatives is due to hold a final vote on Biden's vast rescue package for the world's top economy, with the Democrat-controlled chamber expected to pass it for the president to sign off by the weekend.

They will also be keeping a watch on the European Central Bank's next board meeting this week, looking for an idea about its plans for monetary policy in light of rising inflation expectations, while the Fed's gathering takes place next week.