September 24, 2022

The Hang Seng Index (HSI) it fell as much as 2.6%, breaking below 18,000 points, before recovering slightly. By 3:30 a.m. ET, it was trading down 2% at 18,079, its lowest level since December 2011. Australia’s S&P/ASX 200 was down 1.6%, while Japan’s Nikkei 225 (N225) and the South Korean Kospi fell by 0.6%. Chinese Shanghai Composite Index (SHCOMP) slipped 0.3%.

The drop came after the Federal Reserve on Wednesday approved a third straight 75 basis point rate hike in an aggressive move to fight the red-hot inflation plaguing the US economy.

The big hike, which was unfathomable to the market just a few months ago, brings the US central bank’s benchmark interest rate to a new target range of 3%-3.25%. That’s the most since the 2008 global financial crisis.

“If you were to compare this rate hike cycle to previous rate hike cycles going back to 1983, the Fed has never raised rates this much in such a short period of time,” said David Chao, global market strategist for Asia-Pacific (ex-Japan) at Invesco.

“It is becoming increasingly difficult for the US to avoid recession given the Fed’s ‘strong and rapid’ rate hikes,” he added.

Hong Kong pegs the value of its currency to the US dollar, and to maintain that peg, the city’s central bank raised its key rate by 75 basis points on Thursday.

Meanwhile, the Bank of Japan kept short-term interest rates at minus 0.1 percent on Thursday, maintaining its policy of trying to stimulate the economy. The Japanese yen fell to 145 against the US dollar after the decision, touching a new 24-year low.

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Investor sentiment in the region was hurt by a number of other factors, including rising tensions between the US and China over Taiwan. US Navy and Canadian warships passed through the Taiwan Strait on Tuesday, just two days after President Joe Biden said US military personnel would defend Taiwan if China’s military launched an invasion of the self-ruled democratic island.

“The geopolitical backdrop, the China slowdown story, the potential for energy rationalization in Europe, a strong dollar and a fragile domestic market.” [US] stock and real estate markets point to clear recession risks,” ING analysts said in a note on Thursday.

“The Federal Reserve’s more aggressive rate hike profile and tighter monetary conditions will only heighten the threat,” they added.

— Emi Jozuka, Junko Ogura, Kathleen Benoza in Tokyo contributed to this report.

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