Xi-Trump summit produces no meaningful outcomes beyond two-month detente extension
Asian government bond yields climbed Friday even as oil prices pulled back, signaling continued caution about inflation and the prospect of higher interest rates as the Middle East conflict drags on. A selloff in U.S. government bonds spilled over into Asian debt markets, with Treasury yields hitting highs not seen since 2007.
Japanese government bond yields were trading at multidecade highs early Friday. The 10-year yield gained 3.5 basis points to 3.110%, the highest level since August 1996. Australia’s 10-year sovereign securities yield rose 3.4 basis points to 5.403%, while New Zealand’s 10-year yield was up 3.3 basis points at 5.104%.
The bond rout has renewed fears that tighter financial conditions could ultimately slow economic activity, analysts at BMI, a unit of Fitch Solutions, said. While higher rates do not automatically translate into a credit crunch, BMI said sustained increases in funding costs can lead banks to become more selective in extending credit to households and firms, squeezing the spending and investment that account for a substantial share of developed economies’ gross domestic product.
The resurgence of energy prices due to re-escalation in the Middle East has been a key factor in the global yield surge, fueling expectations of more aggressive central bank tightening. But oil started lower Friday morning as traders weighed reports of a potential proposal to reopen the Strait of Hormuz, a key energy-shipping route blocked off by the fighting.
Front-month West Texas Intermediate futures shed 1.7% to $93.02 a barrel, while front-month Brent dropped 0.8% to $105.70 a barrel, according to ICE data. However, given the history of failed negotiations between Washington and Tehran, market participants remained cautious, OCBC strategists said.
“We’ve been here before and significant hurdles remain, with neither side willing to give up its leverage easily,” the OCBC strategists said.
Regional equities were mixed, with many markets closed for holidays. Hong Kong’s Hang Seng Index was 1.6% lower, Australia’s S&P/ASX 200 was down 0.6%, and Japan’s Nikkei Stock Average was 0.8% higher. South Korea, Taiwan and China were closed.
Gold and silver remained under pressure as higher yields dimmed the appeal of non-yielding assets. Spot gold was 0.1% higher but still below $4,300 a troy ounce, while silver was flat at $63.91.
Asian currencies continued to feel the sting of a stronger dollar and higher rates. The yen remained around 158 to the dollar, keeping intervention chatter in play, while the Thai baht and Indonesian rupiah continued to underperform.
“The external backdrop remains difficult for Asia FX,” said Lloyd Chan of MUFG.
Bitcoin was muted as well, trapped below $85,000 as yields and rate expectations curbed the cryptocurrency’s attempt to rally.
The high-profile summit between Chinese leader Xi Jinping and President Trump did little to lift market mood, yielding no meaningful outcomes as had been widely expected. The two sides agreed to a modest two-month extension of the existing trade detente, but that still leaves “issues over tariffs, agricultural purchases, rare earths, and technology restrictions unresolved,” Chan said.
The next meaningful test will come at the APEC Summit in Shenzhen, said Carlos Casanova of UBP, which will offer another opportunity to convert diplomatic engagement into concrete agreements.