Asian markets, US futures tumble after Fed signals a March rate hike

Investors worry higher US rates could spark capital outflows and currency depreciation in emerging markets in Asia, causing financial turbulence.

Japan’s Nikkei (N225) and Korea’s Kospi (KOSPI) both dropped about 3%. Hong Kong’s Hang Seng (HSI) lost 2.6%, and China’s Shanghai Composite Index (SHCOMP) was down nearly 1%.

Tech shares fell heavily. An index in Hong Kong tracking the largest Chinese technology companies sank nearly 5%.

On Wall Street, Dow (INDU) futures were down about 390 points. S&P 500 (INX) and Nasdaq (COMP) were down 1.3% and 1.5% respectively.
Federal Reserve Chairman Jerome Powell said Wednesday that “the committee is of a mind to raise the federal funds rate at the March meeting, assuming that the conditions are appropriate for doing so.”

The comment came after the central bank concluded its two-day meeting and indicated that “it will soon be appropriate to raise the target range for the federal funds rate,” with inflation well above 2% and a strong labor market.

The Fed also said it expects the unwinding of balance sheet to commence after it starts raising rates.

Expectations for higher US rates pushed a dollar index to the highest level in nearly a month. The DXY US Dollar Currency Index is up 0.7% to trade at 96.64.

“Outside of an exogenous growth shock there is little that would prevent the Fed from raising interest rates at its March meeting,” wrote Kerry Craig, global market strategist for JP Morgan Asset Management, in a note on Thursday.

The swift rotation by the Fed to quantitative tightening and withdrawal of liquidity will likely “add to market volatility over the course of the year,” he said.

Xi Jinping urges West not to 'slam the brakes' by hiking interest rates too quickly

The International Monetary Fund warned recently that emerging market and developing economies should prepare for possible turbulence in financial markets as the United States and Europe lift policy rates.

“Higher returns elsewhere will incentivize capital to flow overseas, putting downward pressure on emerging market and developing economy currencies and raising inflation,” the organization said in its latest world economic outlook report on Tuesday.
Chinese President Xi Jinping even urged central banks in the West not to hike interest rates too fast to fight inflation, as his country goes in the other direction to battle a sharp economic slowdown.

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