Stock rally fizzles on revived inflation fears

© Reuters. Employees of the foreign exchange trading company Gaitame.com work in front of monitors showing the Japanese yen exchange rate against the U.S. dollar, the euro and Nikkei share average at its dealing room in Tokyo, Japan June 22, 2022. REUTERS/Issei Kato

By Sam Byford

TOKYO (Reuters) - Asian stocks slipped across the board on Wednesday, failing to extend Wall Street's rally as persistent worries about interest rates and inflation remained a key focus for investors, while the Japanese yen hit a fresh 24-year low against the dollar.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.39%, still up 1.02% on the more than five-week low it hit on Monday. Tokyo's Nikkei gave up early gains and was flat.

Investors are continuing to assess how worried they need to be about central banks pushing the world economy into recession as they attempt to curb red hot inflation with interest rate increases.

The main U.S. share benchmarks rose 2% overnight on the possibility the economic outlook might not be as dire as thought during trade last week when the S&P 500 logged its biggest weekly percentage decline since March 2020. [.N]

But the lift in sentiment did not last long with S&P 500 and Nasdaq futures both down nearly 1% on Wednesday while EUROSTOXX 50 futures lost 1.3% and FTSE futures shed 0.9%.

"I think that this recent post-holiday bear market rally is a reflection of the uncertainty that investors have regarding whether we have seen the peak of inflation and Fed hawkishness or not – I think we're close," said Invesco global market strategist for Asia Pacific David Chao.

"Even though I suspect global equity markets could end higher at the end of the year than where we are today, it's conceivable to expect continued market volatility until it becomes clear that the Fed is not going to force the U.S. economy into contraction in order to tamp down persistent levels of inflation."

Chinese blue chips lost 0.44%, Hong Kong's Hang Seng Index fell 1.24% and South Korea's KOSPI was down 1.82%.

U.S. Federal Reserve chair Jerome Powell is due to start his testimony to Congress on Wednesday with investors looking for further clues about whether another 75-basis-point rate hike is on the cards in July.

Economists polled by Reuters expect the Fed will deliver a 75-basis-point interest rate hike next month, followed by a half-percentage-point rise in September, and won't scale back to quarter-percentage-point moves until November at the earliest.

Most other global central banks are in a similar situation, apart from the Bank of Japan, which last week pledged to maintain its policy of ultra-low interest rates.

The gap between low interest rates in Japan and rising U.S. rates has weighed on the yen, which hit a new 24-year low of 136.71 per dollar in early trading, before drifting firmer to 136.25.

Minutes from the Bank of Japan's April policy meeting released Wednesday showed the central bank's concerns over the impact the plummeting currency could have on the country's business environment.

Other currency moves were more muted on Wednesday, with the dollar index, which tracks the greenback against six peers, a touch firmer at 104.62.

The yield on benchmark U.S. 10-year Treasuries was fairly steady at 3.2617%.

Oil prices fell with U.S. President Joe Biden expected on Wednesday to call for a temporary suspension of the 18.4-cents a gallon federal tax on gasoline, a source briefed on the plan told Reuters. [O/R]

Brent dropped 3.37% to $110.79 a barrel, while U.S. crude fell 3.71% to $105.46.

Spot gold dropped 0.32%, trading at $1,826.72 an ounce.

Bitcoin lost 6.54% from its Tuesday high, trading at $20,288 after falling as low as $17,592 last week.