Asian stocks dip, bonds in focus after torrid September

On October 1, Asian stocks experienced a subdued performance and global bonds faced pressure following a lackluster September. Investors were concerned about the slower-than-anticipated rise in US inflation in August, which reduced the likelihood of a Federal Reserve rate hike later in October. Micron Technologies, an AI chipmaker, released earnings that failed to bolster the disheartened atmosphere in Asia.

Meanwhile, peace negotiations between the US and Iran aimed at ending the seven-month-long conflict in the Middle East stalled, contributing further to oil price volatility.

MSCI's broadest Asia-Pacific index, excluding Japan, declined by 0.2%, with South Korea's KOSPI falling 0.14%. Japan's Nikkei, however, rose over 1% due to gains in chip-related shares. Futures for the Nasdaq and S&P 500 were up by 0.3%. European stock futures, on the other hand, slipped by 0.75% in early trading.

Analysts, including Charu Chanana, chief investment strategist at Saxo, noted that while Micron's earnings underscored the demand for AI and memory, markets might be increasingly questioning if they have reached a peak memory shortage despite sustained demand exceeding supply. The macroeconomic backdrop became more mixed, with softer US data alleviating some pressure on Fed expectations and short-term yields. However, long-term yields remained elevated, raising concerns about the cost of capital.

US 10-year Treasury yields rose to 5.306%, the highest level since mid-June 2007, while the 30-year yield hit 5.634%, its highest level since June 2002. Focus was on how long US Treasury yields would remain above the crucial 5% threshold. In the US, debt amounted to over US$40 trillion, and the fiscal situation showed no signs of improvement, leading analysts to emphasize the trajectory of the rate move and its velocity.

US inflation data released on September 30 indicated a lower-than-expected increase in August, with price pressures moderating compared to previously reported figures. This led traders to adjust their expectations for a Federal Reserve rate hike scheduled for October 28. The probability of a rate hike in October dropped to 38%, down from 50% the previous day, according to CME's FedWatch tool.

The Federal Reserve raised rates in September for the first time in three years and signaled further increases in borrowing costs. However, New York Fed President John Williams' comments on September 29 suggesting "no urgency" for additional actions diminished the chances of an October hike. The US dollar remained relatively stable near a two-month high, buoyed by elevated Treasury yields.

Conversely, the euro remained steady at US$1.1334 after falling 2.5% in September, while the Japanese yen weakened by 0.3% to US$157.95 per dollar after gaining 1.5% in September.

Bank of Japan policymakers indicated a potential acceleration in interest rate hikes, as reported in a summary of opinions from their September meeting. In commodities, oil prices remained largely unchanged as investors evaluated the outcome of US-Iran peace talks and the outlook for Middle East crude exports. Brent crude futures were at US$98.15 a barrel, following a surge of more than 14% in September, marking the third consecutive month of gains.