Inflation, Interest Rate Concerns Dominate Over Geopolitical Tensions

Interest Rate Concerns

In the current scenario, Asian markets are poised to open on a defensive note this Tuesday, due largely to rising worries over inflation and ‘higher for longer’ interest rates globally. These financial concerns seem to overshadow even the brief uprising by Russian mercenaries against the Kremlin.

Date: June 27, 2023

Place: New Delhi, India

Impact on Wall Street and Yield Curve Inversion

The lingering worries led Wall Street to close in the red on Monday, with the Nasdaq shedding more than 1% for the third trading day in a row over the past four days. Concurrently, the U.S. yield curve inversion accelerated, reaching near-historic levels.

Driving Factors: Inflation and Policy Concerns

Interestingly, the driving factors for this sentiment are inflation and policy concerns more than geopolitical fears. This is evidenced by the fact that the increases in traditional ‘safe haven’ assets like gold, bonds, the yen, the Swiss franc, and the U.S. dollar on Monday were relatively small, and in some cases, negligible.

Calls for Rate Hikes and Concerns over Global Economy

Adding to the pressure, the Bank for International Settlements called for more rate hikes on Sunday, warning that the world economy is at a crucial juncture in the fight against inflation. This sentiment was echoed by the International Monetary Fund’s Gita Gopinath, who cautioned on Monday that investors may be too optimistic about the speed and cost of taming inflation.

No Major Asian Economic Indicators

Without any major Asian economic indicators, policy decisions, or speeches from policymakers scheduled for Tuesday, it is anticipated that investors will continue in the same vein as where U.S. markets left off on Monday.

Deepening Yield Curve Inversion

Significantly, the U.S. 2-year/10-year yield curve inverted even further on Monday, to 104 basis points. This figure is only 6 bps away from the historic inversion of 110 bps observed in the immediate aftermath of the U.S. regional banking shock in March. It is worth noting that an inverted curve has preceded every U.S. recession in the past half-century.

Corporate Developments: Japan’s Semiconductor Industry

In the corporate world, Japan is increasing its efforts to boost its semiconductor industry. A government-backed fund on Monday agreed to buy semiconductor materials maker JSR Corp for about $6.4 billion. This is the latest in a series of steps taken by the government to regain Japan’s lead in advanced chip production and to maintain its edge as a manufacturer of materials and tools used in their production.

Broader Implications in the Tech Sector

This move also reflects a larger battle across the continent, as countries seek to bolster their presence in the rapidly evolving tech sector, especially in artificial intelligence (AI), and exert control over their supply chains.

Importance of Exchange Rates

Exchange rates play a crucial role in this race. A cheaper currency is generally more attractive for overseas investment and capital inflows, and it can boost exports. From a global perspective, the Japanese yen has weakened against the dollar significantly more than its regional counterparts so far this year.

Upcoming Key Developments

Looking ahead, the following are some key developments that could further shape the markets on Tuesday:

  • S. consumer confidence (June)
  • Canada CPI inflation (May)
  • European Central Bank’s (ECB) global policymaker gathering in Sintra, Portugal.


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