Asia stocks slump on hawkish Fed signals, central bank caution

© Reuters.

By Ambar Warrick

Investing.com-- Asian stock markets sank on Thursday after the Federal Reserve stuck to its hawkish rhetoric despite easing inflation, while anticipation of central bank meetings in Europe and the UK also kept sentiment cautious.

The Federal Reserve hiked interest rates by 50 basis points (bps) on Wednesday, as expected. But Chair Jerome Powell warned that rates will likely peak at higher-than-expected levels, and that the central bank has no plans for a dovish pivot in the near-term.

His comments came even as recent data showed U.S. inflation was falling further from annual peaks - a result of rising interest rates and cooling economic growth. But Powell's comments suggest that the central bank is far from done with its current rate hike cycle.

Still, markets are now pricing in the possibility of a smaller, 25 bps hike in February.

Rising interest rates weighed heavily on Asian stocks this year, as tightening monetary conditions and higher bond yields eroded appetite for stocks. Focus is also on interest rate decisions from the Bank of England and the European Central Bank due later on Thursday. Both central banks are expected to hike rates by 50 bps each, as they move to curb overheated inflation.

Technology-heavy bourses fell the most, with Hong Kong's Hang Seng index and South Korea's KOSPI tumbling over 1% each.

A batch of weak data also weighed on regional sentiment, with readings from several major countries showing that the Asian economy remained under pressure.

Japan's Nikkei 225 index fell 0.4% as the country logged a bigger-than-expected trade deficit in November, with strong exports doing little to offset high fuel and food imports.

Chinese stocks also sank tracking substantially weaker-than-expected industrial production and retail sales data. The blue-chip Shanghai Shenzhen CSI 300 index and the Shanghai Composite index fell about 0.3% each.

Uncertainty over the pace of China's reopening also weighed on regional markets. While the government scaled back several COVID-linked curbs this month, the country is also grappling with a large spike in COVID-19 cases. Investors feared that the rising case count could delay a further reopening.

Risk-heavy Southeast Asian stocks also fell on Thursday, with Thai and Philippine bourses losing about 0.6% each.

Indonesian stocks also fell after data showed the country's exports rose less than expected in November.