Asian and European investors struggled to extend a global markets rally Wednesday on concerns over the prospect of soaring inflation and a hike in interest rates as the global economy explodes out of the coronavirus crisis.
With US President Joe Biden's $1.9 trillion handout-rich stimulus on the cusp of being passed, focus on trading floors for weeks has been on the impact of an expected spending splurge by the government and pent-up Americans as they emerge from lockdowns with plenty of spare cash.
In reaction to that, benchmark 10-year Treasury yields have climbed in recent months to one-year highs as dealers sell up in expectation that higher inflation will eat into their returns.
This has fanned fears the Federal Reserve will have to begin winding back the ultra-loose monetary policies -- including record low interest rates -- that have been a key driver of the year-long equities rally.
Those worries were soothed Tuesday when a closely watched sale of new three-year US debt passed off without a hitch -- helping push yields down -- though focus is now on the auctions of 10- and 30-year Treasuries Wednesday and Thursday. Weak demand for seven-year notes last week sparked a sharp sell-off across world markets.
The news provided a much-needed boost to Wall Street, where the tech-rich Nasdaq soared 3.7 percent, while the Dow and S&P 500 were also well in positive territory.
European markets also rose, with Frankfurt tapping a new record high.
But Asia fluctuated through the day Wednesday.
There were gains in Hong Kong, Wellington, Taipei, Manila, Mumbai, Bangkok and Jakarta but Tokyo was barely moved, while Shanghai, Sydney, Singapore and Seoul all fell.
London, Paris and Frankfurt started their day with losses.
Cathay Pacific dropped almost two percent in Hong Kong at one after the troubled carrier announced a record US$2.8 billion loss last year as it was sideswiped by the impact of coronavirus. It later pared the losses.
- Stimulus edges closer -
Tim Murray, a strategist at T Rowe Price, had a word of warning for investors.
"After remaining at low levels for several years, inflation expectations for the rest of 2021 have risen because of an anticipated release of pent‑up consumer demand in the US and abroad," he said in a note.
"While the anticipated inflation rate is relatively modest, it is notable because expected inflation levels have not been this high since June 2014. In our view, US investors should not continue to expect the abnormally low levels of inflation seen over the past decade."
Adding to concerns about inflation was data showing Chinese producer prices rose last month at their fastest pace in two years owing to increasing shipping costs, microchip shortages and increasing oil demand.
"The surge in prices at the factory level adds weight to the argument that higher inflation is in the pipeline as increases in costs at the factory level are likely to be passed on to consumers," said CMC Markets' David Madden.
Expectations for the global economic recovery were further enhanced Tuesday when the Organisation for Economic Co-operation and Development sharply increased its growth outlook, including a more than doubling of its US output estimates for this year.
"Global economic prospects have improved markedly in recent months, helped by the gradual deployment of effective vaccines, announcements of additional fiscal support in some countries, and signs that economies are coping better with measures to suppress the virus," it said in a report.
Investors are now looking to Washington, where the House of Representatives is due to hold a final vote on Biden's vast rescue package for the world's top economy, with the Democrat-controlled chamber expected to pass it for the president to sign off by the weekend.
They will also be keeping a watch on the European Central Bank's next board meeting this week, looking for an idea about its plans for monetary policy in light of rising inflation expectations, while the Fed's gathering takes place next week.
Key figures around 0820 GMT -
Tokyo - Nikkei 225: FLAT at 29,036.56 (close)
Hong Kong - Hang Seng: UP 0.5 percent at 28,907.52 (close)
Shanghai - Composite: DOWN 0.1 percent at 3,357.74 (close)
London - FTSE 100: DOWN 0.6 percent at 6,691.35
Euro/dollar: DOWN at $1.1886 from $1.1894 at 2230 GMT
Pound/dollar: DOWN at $1.3883 from $1.3887
Euro/pound: DOWN at 85.60 pence from 85.61 pence
Dollar/yen: UP at 108.71 yen from 108.50 yen
West Texas Intermediate: DOWN 0.7 percent at $63.55 per barrel
Brent North Sea crude: DOWN 0.9 percent at $66.94 per barrel
New York - Dow: UP 0.1 percent at 31,832.74 (close)