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Asian stocks drop as Fed shift reverberates; Treasury yields slide


WORLDWIDE: HEADLINES 

Wall St Week Ahead Fed shift causes rally in value stocks to wobble 

The Federal Reserve’s hawkish shift is forcing investors to reevaluate the rally in so-called value stocks, which have taken a hit in recent days after ripping higher for most of the year. 

Shares of banks, energy firms and other companies that tend to be sensitive to the economy’s fluctuations have tumbled following the Federal Reserve’s meeting on Wednesday, when the central bank surprised investors by anticipating two quarter-percentage-point rate increases in 2023 amid a recent surge in inflation. 

The Russell 1000 Value Stock Index (.RLV) is down 4% from its June peak, though still up 13.2% this year. Its growth counterpart (.RLV) is up 9.1% year-to-date. 

One factor driving the move is the idea that a Fed more strongly focused on preventing the economy from overheating may begin unwinding easy-money policies sooner than previously expected. On Friday, St. Louis Federal Reserve President James Bullard said the central bank’s shift was a “natural” response to economic growth and inflation moving quicker than expected, bolstering that view. 

“Value stocks had gotten ahead of themselves, particularly in energy and financials, and the folks that are caught offsides are starting to unwind those trades,” said Jamie Cox, managing partner at Harris Financial Group. 

The post-Fed meeting slide in value has been accompanied by a retreat in some commodity prices, a surge in the dollar and a rally in U.S. government bonds that dragged down yields on the benchmark U.S. Treasury to around 1.44% on Friday afternoon. 

Investors will be keeping a close eye on next week’s economic data for clues on whether the recent surge in inflation — which saw consumer prices accelerate at their fastest pace in 12 years last month — will persist. 

New home sales and mortgage applications are due out June 23, while May’s consumer spending numbers are expected on June 25. 

Full coverage: REUTERS 

American Airlines to cut 1% of July flights as travel rebound strains operations 

American Airlines (AAL.O) on Sunday said it would cancel around 1% of its flights in July to serve a surprise uptick in travel demand at a time when the airline struggles with unprecedented weather and a labor shortage at some of its hubs. 

American Airlines said the move would bring additional resilience and certainty to its summer operations. 

“(We) feel these schedule adjustments will help ensure we can take good care of our customers and team members and minimize surprises at the airport,” the company said in a statement. 

The airline said its cancellations were targeted at impacting the smallest number of customers “by adjusting flights in markets where we have multiple options for re-accommodation.” 

The announcement was first reported by the WSJ. 

Airlines and other transportation operators have seen a quick ramp up in demand as U.S. COVID-19 vaccination rates increased and travel restrictions lifted in recent weeks. 

According to data from the U.S. Transportation Security Administration, nearly 50 million airport passengers were registered in May, up 19% from April. So far in June, the TSA has registered nearly 35 million air passengers. 

American Airlines said the incredibly quick ramp up of customer demand also came at a time when bad weather caused multi-hour delays over the last few weeks, disrupting flight and crew work hours. The company said some of its vendors were also struggling with labor shortages, impacting the airline’s operations. 

Full coverage: REUTERS 

WORLDWIDE: FINANCE/ MARKETS  

Asian stocks drop as Fed shift reverberates; Treasury yields slide 

Asian stocks dropped on Monday as investors mulled the implications of a surprise hawkish shift last week by the U.S. Federal Reserve, while the Treasury yield curve flattened further with 30-year yields dropping below 2%. 

Japan’s Nikkei (.N225) led declines with a 3.3% drop and dipped below 28,000 for the first time in a month, while MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 1% in early trading. 

Chinese blue chips (.CSI300) opened 0.4% lower, and Australia’s benchmark (.AXJO) slid 1.8%. 

Benchmark 10-year U.S. Treasury yields fell to the lowest since early March at 1.4110%, while those on 30-year bonds slid as low as 1.9990% for the first time in more than four months. 

The yield curve – measured by the spread between two- and 30-year yields – was the flattest since early February. 

The U.S. dollar hovered near the 10-week high touched on Friday versus major peers, following its biggest weekly advance in more than a year. 

“The story of last week was arguably the one-way move in the USD, which morphed into a clear de-grossing through equity markets, with the ‘value’ parts of the market really getting clobbered,” Chris Weston, the head of research at Pepperstone Markets Ltd, a foreign exchange broker based in Melbourne, wrote in a client note. 

“It feels that the pain trade is for further strength in the USD, higher real rates, and a flatter Treasury curve, with the market continuing to see the reflation trades unwound.” 

Full coverage: REUTERS 

Oil edges up as Iran nuclear talks drag on 

Oil prices nudged up on Monday, underpinned by strong demand during the summer driving season and a pause in talks to revive the Iran nuclear deal that could indicate a delay in resumption of supplies from the OPEC producer. 

Brent crude futures for August gained 30 cents, or 0.4%, to $73.81 a barrel by 0051 GMT, while U.S. West Texas Intermediate (WTI) crude for July was at $71.96 a barrel, up 32 cents, or 0.5%. 

Both benchmarks have gained for the past four weeks amid optimism over the pace of global vaccinations and a pick up in summer travel. The rebound has already pushed up spot premiums for crude in Asia and Europe to multi-month highs.  

“The rebound in demand in the northern hemisphere summer is so strong that the market is becoming increasingly concerned about further sharp drawdowns on inventories,” ANZ analysts said in a note. 

Negotiations to revive the Iran nuclear deal took a pause on Sunday after hardline judge Ebrahim Raisi won Iran’s presidential election amid a low turnout on Saturday. Two diplomats said they expected a break of around 10 days.  

ANZ said the election could delay the nuclear deal. 

“The possibility of Iranian oil hitting the market in the short term looks unlikely,” the bank said, adding that Iran is insisting that U.S. sanctions placed on Raisi be removed before an agreement is reached. 

Full coverage: REUTERS 

Dollar holds near multi-month high after Fed’s hawkish tilt 

The dollar held near multi-month peaks against other major currencies on Monday, after the U.S. Federal Reserve surprised markets last week by signaling it would raise interest rates and end emergency bond-buying sooner than expected. 

The dollar index, which tracks the greenback against six major currencies, stood at 92.232 after gaining 1.9% last week, its biggest rise since March 2020. 

On Friday, it jumped above key resistance around 91.95, marking a 61.8% retracement from its decline to 89.53 earlier this month from an April peak of 93.439. 

“Like many, I had expected the 61.8 Fibonacci retracement in the dollar index to hold for a bit … and at least see some consolidation,” said Chris Weston, the head of research at Pepperstone Markets Ltd, a foreign exchange broker based in Melbourne. 

“That wasn’t to be, and it seems technical resistance means very little when this type of re-positioning event plays out.” 

The euro traded at $1.1872, having hit a 2 1/2-month low of $1.1847 on Friday. 

The British pound fetched $1.3809, standing near Friday’s two-month low of $1.3791. 

The Australian dollar wobbled at $0.7503, having dropped to as low as $0.7478, a low last seen in December. 

The safe-haven yen held firmer as the Fed’s tilt hit risk asset prices. It ticked up to 110.185 yen to the dollar, pulling away from Thursday’s 2 1/2-month low of 110.825 

The jolt to foreign exchanges was triggered on Wednesday by Fed forecasts showing 13 of the 18-person policy board saw rates rising in 2023, versus only six previously, with the median board member tipping two hikes in 2023. 

Full coverage: REUTERS 

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