Asian stocks weather bond storm, oil retreats slightly

Asian shares endured a rocky Friday as a wave of bond selling sent US yields to multi-decade peaks, intensifying global borrowing costs and fueling concerns over escalating equity valuations. The resurgence of oil prices above $100 per barrel, with Brent crude touching $105, heightened inflation worries and propelled the dollar towards a 1% weekly surge.

Chinese President Xi Jinping was in Washington for discussions with President Donald Trump, yet despite the high-profile meeting, little progress was made on contentious subjects such as artificial intelligence, trade, Taiwan, and the ongoing conflict with Iran. MSCI's Asia-Pacific index, excluding Japan, remained stagnant, with most markets, including mainland China, Taiwan, and South Korea, observing a holiday.

The Nikkei in Japan climbed 1%, whereas Australia's resources-rich shares slipped 0.6%. The Hang Seng index in Hong Kong declined 1%. Risk assets are under pressure from a sharp drop in global bonds, as inflation concerns and fiscal stresses compel investors to seek higher returns, especially on longer-term debt. Nigel Green, CEO of deVere Group, a financial advisory firm, warned, "The world's bond markets are in turmoil, and disregarding this could prove to be highly costly.

Once risk-free rates exceed 5% in the world's biggest economy, all assets globally must prove their worth against that benchmark. Equities, property, private credit, emerging market debt - none are exempt."

The 10-year Treasury yield surged 1 basis point to 5.1915%, after a 20 basis point increase over two days, marking the highest level since 2014. Thirty-year US bond yields climbed 2 basis points to 5.4805%, having risen 16 basis points over the past two days to hit 5.5016%, the highest since 2004. This surge propelled US mortgage rates to 7%, placing strain on the housing market.

Asian bonds continued the global sell-off, with Japan's 10-year government bond yields up 4 basis points to 3.115%, the highest since 1996. Australia's 10-year government bond yields also increased 4 basis points to 5.408%.

The short end of the Treasury curve experienced no respite. Fed funds futures now suggest a 71% probability of another rate hike next month, up from around 53% earlier in the week, and indicate more than 90 basis points of tightening still to come this cycle, equivalent to nearly four quarter-point hikes. The 2-year yields remained stable at 4.9035%, after a 16 basis point increase this week, nearing a two-year high.

The Federal Reserve's decision to resume rate hikes last week is reverberating through global markets. As inflation pressures mount, smaller central banks are adopting a more aggressive stance, with Norway's Norges Bank raising rates on Thursday and Sweden's Riksbank indicating a possible hike by the end of the year. Mexico's Banxico held rates steady but signaled a potential end to its prolonged pause.

This maintains the US dollar strong, surging 1% this week to 101.25 against its major counterparts, close to the highest level since late July.

In the commodities market, Brent crude oil retreated 0.8% to $105.75 per barrel, after a 3% increase overnight due to a Houthi missile strike on Saudi Arabia, reigniting fears of supply disruptions. Meanwhile, participants in the market remain hopeful for a potential truce between the US and Iran, as the two nations reportedly entertain a phased approach to reopen the Strait of Hormuz.