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Asia stocks rose on Wednesday, encouraged by a rally on Wall Street, but gains were kept in check by worries that aggressive central bank policy tightening will stifle global growth and raise the risks of stagflation.
The World Bank on Tuesday slashed its global growth forecast by nearly a third to 2.9 per cent for 2022, warning that Russia's invasion of Ukraine has compounded the damage from the Covid-19 pandemic, and many countries now faced recession.
Nevertheless, US stocks rallied to end higher for a second straight day, buoying the mood in Asia. MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.15 per cent, recouping most of its losses in the previous session, while Japan's Nikkei 225 index was up 1 per cent.
Australia's S&P/ASX 200 index rose 0.72 per cent, recovering half of its slide on Tuesday after the central bank unexpectedly raised interest rates by the most in 22 years and flagged more tightening to come.
India's central bank is also expected to raise rates later in the day (0430 GMT) in a bid to tame hot prices, with more hikes being priced in.
On Thursday, the European Central Bank meets and markets are expecting it to at least lay the groundwork for rapid rate rises, if not begin them with a small hike.
Frontloading
"I think the hikes coming from the central banks, or the frontloading is actually positive because it will allow us to kind of curb inflationary pressures," said Trinh Nguyen, senior economist at Natixis in Hong Kong, adding markets could be correcting from Tuesday’s "overreaction". "But I wouldn't say that it's an reversal, unless a change of data will tell us otherwise," Nguyen said.
US Treasury Secretary Janet Yellen told senators on Tuesday that she expected inflation to remain high and the Biden administration would likely increase the 4.7 per cent inflation forecast for this year in its budget proposal.
Chinese stocks were supported by hopes its economy is slowly getting back on track as strict Covid-19 lockdowns are relaxed. Hong Kong's Hang Seng index rose 1.22 per cent, while China's benchmark index CSI300 edged up by 0.47 per cent.
"The bounce in risk sentiment is due to a more positive China tilt where the outlook is set to brighten up as Covid restrictions ease, and state-owned banks are obliged to increase lending again," Stephen Innes, Managing Partner at SPI Asset Management said in a note.
Currencies
In currencies, the yen hit a fresh 20-year low versus the dollar at 133 and slipped to a seven-year trough against the euro as traders awaited the ECB meeting, which is likely to leave Japan alone among its major peers in sticking to ultra easy monetary policy.
The US Federal Reserve is expected to raise its benchmark funds rate by 50 basis points next week and again in July.
The US benchmark 10-year yield was 2.992 per cent, having edged down from a four week high of 3.064 per cent on Tuesday after Target Corp warned about excess inventory and said it would cut prices, offering some relief to those who think inflation may be peaking.
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