Asian shares hit a one-month low, U.S. stock futures fell and the dollar rose on Tuesday as hawkish remarks from central bankers tempered expectations for interest rate cuts and traders waited to hear from the Fed's influential Christopher Waller.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.4% to its lowest since mid-December.
The Hang Seng headed for its worst session of the year, dropping 2% to a 14-month trough. Japan's Nikkei snapped a six-session winning streak and retreated from a 34-year high, closing 0.8% lower at 35,619.
U.S. markets were shut for a holiday on Monday, but S&P 500 futures were 0.5% lower in Asia trade on Tuesday and Nasdaq 100 futures dropped 0.6%. European futures fell 0.6% and FTSE futures fell 0.3%.
Fed funds futures also dropped notably for Asia hours - reflecting a slight cooling in interest rate cut expectations - and short-term Treasury yields rose.
Two-year yields were last up 7 basis points and tugged the dollar to one-month highs on the risk-sensitive Australian and New Zealand dollars.
On Monday, European bonds were sold after European Central Bank officials pushed back on market bets on rate cuts.
Bundesbank President Joachim Nagel said it was too early to discuss cuts and Austrian central bank governor Robert Holzmann warned not to bank on a cut at all this year.
"The upshot ... was to see money markets scaling back the implied probability of a 25 bp ECB cut in March to 26% from 40%," said NAB currency strategist Ray Attrill.
Two-year German bunds rose more than 7 bps to 2.6% and 10-year bunds rose 5.4 bps to 2.2%, lending support to the euro, which climbed to a three-week high against the Swiss franc.
A stronger dollar pushed the euro about 0.3% lower to a one-week trough on the greenback at $1.0913 on Tuesday.
The Australian and New Zealand dollars dropped more than 0.6%, with the Aussie falling through its 50-day moving average to $0.6610 and the kiwi down to $0.6161.
IOWA AND INTEREST RATES
Policy and politics top the radar for the rest of the session.
Donald Trump secured a resounding victory in the first 2024 Republican presidential contest in Iowa on Monday. His candidacy is likely to stir volatility in markets.
Federal Reserve Board Governor Waller's speech on the economic outlook at 1600 GMT, meanwhile, is also to be closely watched since markets had so heartily cheered a shift in his hawkish views in November, when he laid out a path to cuts.
"Recall, Waller was responsible for setting up the rally in U.S. equities (when) he gave a defined path by which the Fed could ease," said Pepperstone analyst Chris Weston.
"The risk for gold, Nasdaq 100 longs and U.S. dollar shorts is that he pushes back on market pricing for a March cut and shows a lack of urgency to normalise policy."
Gold steadied at $2,048 an ounce, holding on to gains from last week.
Elsewhere in commodities, iron ore extended falls to touch more than five-week lows in Singapore, dragging on share prices for Australia-listed miners.
Houthi forces in Yemen struck a U.S.-owned and operated dry bulk ship with an anti-ship ballistic missile on Monday though oil, which has been supported by the instability in the shipping lane, gave no immediate reaction.
Brent crude futures were steady at $78.10 a barrel.
On the data front, Australian consumer sentiment took a turn for the worse in January as higher mortgage rates stoked concerns over finances. Japan's wholesale inflation was flat in December from a year earlier, slowing for the 12th consecutive month, taking pressure off the Bank of Japan to raise rates.
Bitcoin was steady at $42,700.
Source : Economy News by Reuters / Jan 16, 2024