Marketmind: Inflation, rates worries supersede Russia stress

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.

Asian markets on Tuesday are set to open on the defensive, pressured by worries over inflation and ‘higher for longer’ interest rates globally more than fallout from the brief uprising by Russian mercenaries against the Kremlin.

Wall Street closed in the red on Monday – the Nasdaq shed more than 1% for the third trading day in four – and the U.S. yield curve inversion accelerated to near-historic levels.

But inflation and policy concerns are driving sentiment more than geopolitical fears. The increases in traditional ‘safe haven’ assets like gold, bonds, the yen, Swiss franc and U.S. dollar on Monday were small, in some cases negligible.

The Bank for International Settlements on Sunday called for more rate hikes, warning the world economy is at a crucial juncture in the fight against inflation. The International Monetary Fund’s Gita Gopinath said on Monday investors may be overly optimistic on the speed and cost of taming inflation.

With no major Asian economic indicators, policy decisions or policymaker speeches scheduled for Tuesday, investors will probably pick up from where U.S. markets left off on Monday.

The U.S. 2-year/10-year yield curve inverted further on Monday, to 104 basis points, which is only 6 bps away from the historic inversion of 110 bps in the immediate aftermath of the U.S. regional banking shock in March.

An inverted curve has preceded every U.S. recession in the past half century. Is this time different? So far, it would appear so, although a Fed paper on Friday concluded that restrictive policy “may contribute to a marked slowdown in investment and employment in the near term.”

In the corporate world, meanwhile, Japan is stepping up efforts to bolster its chip industry, with a government-backed fund on Monday agreeing to buy semiconductor materials maker JSR Corp for about $6.4 billion.

The move by Japan Investment Corp (JIC), overseen by the trade ministry, is the latest in a series of increasingly government steps to try to regain Japan’s lead in advanced chip production and maintain its edge as a maker of materials and tools used in their manufacture.

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

A key part of this race is exchange rates. All else equal, a cheaper currency is more likely to attract overseas investment and capital inflows, and boost exports.

Intra-Asian FX moves are crucial, but from a global perspective Japan’s yen has weakened against the dollar so far this year significantly more than its regional counterparts.

Here are key developments that could provide more direction to markets on Tuesday:

– U.S. consumer confidence (June)

– Canada CPI inflation (May)

– ECB, global policymaker gathering in Sintra, Portugal

(By Jamie McGeever; Editing by)

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