Asia markets set for rough ride as US Fed raises interest rate

The drop in the yen could cushion Japanese stocks and Nikkei futures were still trading slightly firmer. Other Asian markets were unlikely to be so lucky and dealers expected losses across most bourses. (A trader works on the floor of the New York Stock Exchange (NYSE) as a television screen displays coverage of U.S. Federal Reserve Chairman Janet Yellen shortly after the announcement that the U.S. Federal Reserve will hike interest rates, in New York, U.S., December 14, 2016. REUTERS)

SYDNEY: Asian markets were set for a rough ride on Thursday after the Federal Reserve raised rates for the first time in a year and hinted at the risk of a faster pace of tightening than investors were positioned for.

Yields on short-term U.S. debt surged to the highest since 2009, sending the dollar to peaks not seen in almost 14 years.

Wall Street suffered its biggest percentage decline since before the Nov. 8 U.S. presidential election, though the loss was slight compared with gains of the last month or so.

The Fed's rate rise of 25 basis points to 0.5-0.75 percent was well flagged but investors were spooked when the "dot plots" of members' projections showed a median of three hikes next year, up from two previously.

Fed Chair Janet Yellen was quick to play down the shift saying only "some" policy makers had changed their forecasts and emphasized the outlook was "highly uncertain".

The plots hardly shouted of an urgency to tighten. The median projection was for 1.4 percent at the end of next year, 2.1 percent for 2018 and 2.9 percent at end 2019.

Dealers also noted that this time last year the median call was for four hikes in 2016.

Still, investors had bet heavily on a more dovish message and many positions were quickly unwound.

"The fact that the market, including me, was leaning the wrong away exacerbated the move," said Steven Englander, Citi's global head of forex.

Fed fund futures <0#FF:> slid to imply around a 50-50 chance that rates would be between 1.25 and 1.5 percent by the end of 2017. The market is pricing in 57 basis points of hikes next year, up from 40 basis points ahead of the meeting.

Yields on two-year Treasury paper jumped 10 basis points to 1.27 percent, the biggest daily increase since early 2015 and the highest level since August 2009.

EMERGING PRESSURE

It also took the premium Treasuries pay over German two-year debt to its fattest since 2000.

That jump could suck more funds out of emerging markets and will be taken badly by stocks and currencies across Asia.

The U.S. dollar was already up across the board, hitting a near 14-year peak against a basket of currencies at 102.100 <.DXY>. The euro skidded 0.9 percent to $1.0528 , while the dollar climbed 1.6 percent on the yen to 117.02 .

The drop in the yen could cushion Japanese stocks and Nikkei futures were still trading slightly firmer.

Other Asian markets were unlikely to be so lucky and dealers expected losses across most bourses.

Citi's Englander said attention would be on the Chinese yuan with the risk a sharply lower opening fix could add to pressure for a competitive depreciation from other Asian currencies.

On Wall Street, the Dow <.DJI> ended Wednesday down 0.6 percent, while the S&P 500 <.SPX> lost 0.81 percent and the Nasdaq <.IXIC> 0.5 percent. [.N]

Stocks have been on a tear in recent weeks on speculation President-elect Donald Trump will pursue tax cuts and increase infrastructure spending.

The rising dollar slugged oil prices, already smarting from concerns about over supply. [O/R]

Brent crude futures were down $2.02 at $53.70 per barrel, while U.S. crude was quoted $2.21 lower at $50.77 per barrel.

Gold dropped to its lowest in more than 10-months around $1,142.66 an ounce . - Reuters