Asian equities and the dollar struggled to find direction on Tuesday, with attention squarely on the timing and pace of US monetary policy normalisation,but investors took some comfort from a late rebound in US stock markets.
Federal Reserve Chair Jerome Powell appears before the Senate Banking Committee on Tuesday for consideration to a second four-year term as head of the Fed, followed by a hearing with vice chair nominee Lael Brainard on Thursday.
The fast spread of the Omicron variant of the coronavirus is also weighing on markets as US hospitalisations due to COVID-19 reached a record high on Monday.
MSCI’s broadest index of Asia-Pacific shares outside Japan slipped as much as 0.3% before trading steady.
The Nikkei index fell 1.3% as trading resumed after a holiday on Monday.
Australian stocks shed 0.8%, Taiwan lost 0.4% and Seoul lost 0.3%.
Hong Kong ticked 0.1% higher and China’s 300 index nudged up.
US December consumer inflation data is due to be released on Wednesday, with headline CPI seen coming in at a red-hot 7% on a year-on-year basis, boosting the case for interest rates to rise sooner rather than later.
But Hou Wey Fook, chief investment officer at DBS Bank, said he did not think inflation was in a “runaway situation”.
“There are a lot of shorter term drivers like the global supply chain and economies re-opening,” said Hou.
“Once we have some normalisation of those things, inflation should kind of come back down to more reasonable levels and the Fed will probably not be too aggressive,” he said.
The Fed in December flagged plans to tighten policy faster than expected in response, with a rate hike perhaps as soon as March.
But that was before it became clear just how fast the Omicron variant would spread, with this week’s hearings the first opportunity for Powell and Brainard to say how the current outbreak of the disease have influenced their outlook.
Some of Wall Street’s biggest banks now expect four US interest rate increases this year starting in March, a more aggressive call than a week ago.
Asian equities have fared relatively better so far this year.
MSCI’s key benchmark has held steady, with gains seen in Indian and Hong Kong stocks, while Japanese and Chinese markets dipped.
US shares had a bruising first week of the year when the Fed signalled that it would tighten policy faster to tackle inflation and then data showed a strong US labour market, unnerving investors who had pushed equities to record highs over the holiday period.
On Monday, the Dow Jones Industrial Average shed 0.45%, and the S&P 500 lost 0.14%.
Technology stocks led the falls early in the day but recovered to leave the Nasdaq Composite up 0.05%.
On Tuesday, the dollar index, which measures the currency against six counterparts, hovered around 95.912.
It hit a more than 16-month high of 96.938 on November 24 amid increasing hawkishness from Fed policymakers, but has since been stuck between that level and 95.544, touched less than a week later.
Yields on 10-year US Treasury notes hit a high of 1.8080% in US trading, levels last seen in January 2020, having shot up 25 basis points last week in their biggest move since late 2019.
The yield later retreated to 1.7568%.
Oil prices rose on Tuesday after two days of losses.
Brent crude futures rose 0.3% to $81.1 a barrel after dropping 1% in the previous session.