Asian stocks fell and the U.S. dollar stood tall on Thursday as markets scrambled to factor in the possibility of another interest rate increase by the Federal Reserve as early as June. Gold stumbled.
Financial spreadbetters predicted Britain’s FTSE 100 .FTSE to open down nearly 1 percent, Germany’s DAX .GDAXI and France’s CAC 40 .FCHI to each pull back 0.6 percent.
MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 1 percent as the prospect of a second U.S. rate hike in six months raised concerns for emerging markets already grappling with a slowing China.
South Korea .KS11 and Australia led regional markets lower with 0.6 and 0.8 percent falls respectively as investors refocused their attention on the growing differences between the health of the world’s biggest economy and its global counterparts.
“In the short term, emerging markets are the most vulnerable,” Steven Englander, global head of G10 FX strategy at Citibank wrote in a note to clients.
“Overall, the divergence trade is revived until further notice,” he wrote in a note to clients, saying the Canadian dollar CAD= and the Aussie AUD=D3 were vulnerable due to concerns around those economies.
Moody’s Investor Services said in a note rising leverage in China and emerging markets in general is an even greater concern now that the possibility of another U.S. interest rate hike this summer is back on the table.
Japan’s Nikkei .N225 rose early thanks to a weaker yen, which fell to a three-week low against the dollar after minutes of the last Fed meeting, but later pared its gains to just 0.2 percent.
The Fed minutes highlighted policymakers’ views that it would be appropriate to raise interest rates in June if economic data points to stronger second-quarter growth as well as firming inflation and employment.
Such views helped revive the prospect of a rate hike in June, which had been dismissed by many investors.
CME fed fund futures showed that the probability of a June rate increase by the Fed rose to 34 percent after the release of the FOMC minutes on Wednesday from 19 percent earlier in the day, 15 percent on Tuesday, and less than 1.0 percent a month ago, according to CME group’s FedWatch.
Nonetheless, many in the market are still skeptical the Fed would raise rates ahead of Britain’s June 23 referendum on whether to remain in the European Union, a risk that was noted by some Fed policymakers. July may be a stronger possibility.
The dollar index .DXY hovered around a seven-week high of 95.27 scaled overnight, boosted by sharply higher U.S. Treasury yields.
The benchmark 10-year Treasury note yield jumped more than 10 basis points on Wednesday US10YT=RR while the yield curve steepened slightly, breaking a multi-month streak of flattening.
The greenback was steady at a three-week high of 110.20 against the yen JPY= hit overnight. The euro was pinned down near $1.1214 EUR=, its lowest since late March.
“With April activity indicators consistent with a healthy bounce-back in growth, we see risks of two rate hikes in 2016, with the first coming in the June/July time horizon,” strategists at Barclays said.
Fed Vice Chairs William Dudley and Stanley Fischer are due to speak later in the day and the markets will be eager to get more details on the Fed’s thinking.
Gold XAU= took the renewed expectations of a U.S. rate hike on the chin. Prices for the precious metal, which are inversely correlated to monetary policy easing, fell 0.1 percent to a three-week low $1256 per ounce.
The stronger dollar also weighed on commodities such as oil, with U.S. crude futures CLc1 losing 0.4 percent to $48.00 a barrel. A stronger dollar tends to put non-U.S. buyers of greenback-denominated commodities at a disadvantage.
Three-month copper on the London Metal Exchange CMCU3 fell to as low as $4563.50 overnight, the weakest since Feb. 19.