Battle between economic optimism and fears about inflation and possible rate hikes that recovery will fuel has continued to play out on trading floors.
Asian markets have fluctuated as the battle between economic optimism and fears about the inflation and possible rate hikes the recovery will fuel continues to play out on trading floors.
After a year-long rally across global indices, investors are struggling to maintain the momentum as government bond yields push ever higher – a sign that borrowing costs will rise in the future.
The sharp rise in US Treasury yields –– which go in the opposite direction to prices –– is being caused by investors selling the bonds owing to expectations the strong recovery and vast government spending will fire inflation.
The panic comes despite repeated pledges by Federal Reserve boss Jerome Powell and other top officials including Treasury Secretary Janet Yellen that the jump in inflation will likely only be temporary and the bank will do whatever is needed to prevent it from getting out of control.
In a sign of the battle facing the Fed is keeping traders' fears at bay, a survey released on Monday showed almost half the US economists asked said they thought the bank would hike rates from their record low next year and almost a third thought an increase likely in 2023.
And while vaccine rollouts are picking up in Britain and the United States, investors are growing worried about Europe, where the inoculation programme has stuttered and a hike in new cases forces countries including France and Germany to reimpose lockdowns.
"Clearly, the market is sceptical that the Fed will be able to keep interest rates at current levels for the next three years," Diana Mousina, at AMP Capital Investors, said.
"We think that nominal bond yields can still shoot higher in the short-term towards two per cent and above on inflation concerns. Markets are likely to worry that this move is permanent, rather than temporary."
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After a largely negative lead from Wall Street, Asia struggled.
Tokyo leads with losses as Hong Kong rises
Tokyo led losses, diving more than two per cent with carmakers including Toyota, Honda and Nissan all taking a hit after a fire at one of chipmaker Renesas' biggest plants halted production of key components in their vehicles.
Renesas warned the fire could shut the plant for a month, putting a strain on an already stretched chip market, which has caused a headache for auto firms as well as tech giants.
Seoul, Mumbai, Singapore, Manila, Jakarta and Wellington also fell, while Hong Kong, Shanghai, Bangkok and Taipei rose.
"Markets quickly moved from a risk-on dovish Fed narrative to concerns about vaccines, renewed European lockdowns, tense US-China trade talks, equity rotation out of tech, and falling oil prices," said Axi strategist Stephen Innes.
Turkish minister reassures investors
On forex markets the Turkish lira fell to as low as 8.47 per US dollar on Monday, having closed at 7.22 at the end of last week. It later clawed back losses at 7.85 to the US dollar.
The central bank governor Naci Agbal has been replaced with Sahap Kavcioglu on Saturday.
The Borsa Istanbul suspended trading for 35 minutes on Monday after automatic circuit breakers kicked in when an early sell-off approached seven per cent.
Finance Minister Lutfi Elvan issued a statement early Monday.
"There will be absolutely no move away from the free market mechanism," Elvan said in a statement.
"We will continue with determination to implement the liberal exchange system."
Elvan also reiterated Turkey's commitment to fighting inflation which has been gathering pace for months.
“The decline in inflation will foster macroeconomic stability through the fall in country risk premiums and a permanent improvement in financing costs, and will contribute to the development of conditions essential for sustainable growth that will enhance investment, production, exports and employment,” Kavcioglu said in a statement on Sunday.
"We can expect some severe burning of foreign reserves to defend the Lira," said OANDA's Jeffrey Halley on Monday.
Key figures around 0610 GMT
Tokyo - Nikkei 225: DOWN 2.1 percent at 29,174.15 (close)
Hong Kong - Hang Seng: UP 0.1 percent at 29,020.94
Shanghai - Composite: UP 1.1 percent at 3,440.85
Euro/dollar: DOWN at $1.1893 from $1.1903 at 2200 GMT
Dollar/Turkish lira: UP at 7.9001 from 7.2185
Pound/dollar: DOWN at $1.3853 from $1.3874
Euro/pound: UP at 85.78 pence from 85.76 pence
Dollar/yen: DOWN at 108.84 yen from 108.87 yen
West Texas Intermediate: DOWN 0.3 per cent at $61.21 per barrel
Brent North Sea crude: DOWN 0.3 per cent at $64.33 per barrel
New York - Dow: DOWN 0.7 percent at 32,627.97 (close)
London - FTSE 100: DOWN 0.9 percent at 6,720.39 (close)