Global shares and longer-term bond yields sank after a hawkish shift in the US central bank’s stance on inflation deepened on Monday.

Japan’s Topix index dropped 2.6 per cent, the worst fall in four months, while Australia’s S&P/ASX 200 shed 1.6 per cent. Hong Kong’s Hang Seng index slid 1.4 per cent and South Korea’s Kospi was down 1 per cent.

The gloomier sentiment rippled to Europe, where London’s FTSE 100 declined 0.6 per cent in morning dealings, with Frankfurt’s Dax down 0.7 per cent and the Cac 40 in Paris off 0.8 per cent.

In bond markets, the yield on the 10-year US Treasury fell 0.05 percentage points to 1.386 per cent. The yield on the 30-year Treasury slipped 0.04 percentage points to as low as 1.974 per cent, marking the first drop below 2 per cent since February as pressure mounted on reflation trades. Bond prices rise as yields fall.

Those falls followed the worst week for Wall Street’s S&P 500 stock benchmark in almost four months. The sell-off was prompted by comments from Federal Reserve chair Jay Powell on Wednesday that signalled the central bank could raise rates to tame inflation sooner than investors had previously thought, rather than maintain supportive policy indefinitely.

The sudden shift sent investors fleeing from shares favoured in the so-called “reflation trade”, or those that benefit from higher inflation, which has dominated markets since the launch of Covid-19 vaccination drives late last year.

Futures for the S&P 500 were 0.4 per cent lower in Asian trading.

Market sentiment has also been hit by comments from James Bullard, president of the St Louis Fed, who suggested the US could raise rates as early as late 2022 in the event of higher-than-expected inflation. The Fed also flagged last week that it would soon begin discussing when to taper its $120bn monthly bond purchases.

“This looks like a market that got too invested in the prior Fed story, which it may have taken far too literally,” said Robert Carnell, head of Asia-Pacific research at ING. “Central banks don’t seem to be able to control the reality shock that hits markets when a more reasonable version of future events is revealed to them.”

“It is unprecedented for US long-end yields to decline . . . following a hawkish Fed meeting before a hiking cycle has even begun,” said George Saravelos, a strategist at Deutsche Bank, referring to the fall in 30-year Treasury yields. “Markets are ultimately saying that if central banks lift-off too early they won’t be able to go very far.”

Commodities prices fell or pared early gains. In Dalian, Chinese contracts for iron ore fell 5.5 per cent, the largest fall in about a month.

Brent crude, the international oil benchmark, was up just 0.1 per cent at $73.61 a barrel after earlier rising about 1 per cent. US marker West Texas Intermediate rose 0.3 per cent to $71.82.

In China, the CSI 300 index of Shanghai and Shenzhen-listed shares slipped 0.5 per cent after banks left the country’s benchmark loan prime rate on hold. Chinese lenders benchmark new loans against the rate.



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