File picture: REUTERS/ALY SONG
File picture: REUTERS/ALY SONG

Tokyo — Asian shares fell on Wednesday as a rise in US bond yields to 3% and warnings from bellwether US companies of higher costs drove fear that corporate earnings could soon peak.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.7% to its lowest in almost three weeks, with tech-heavy Taiwan shares hitting two-month lows on concern about slowing semi-conductor demand.

Japan’s Nikkei also dropped 0.7%.

S&P E-mini futures slipped 0.2%. Wall Street shares skidded overnight, with the S&P 500 falling 1.34%, the most in two-and-a-half weeks.

Industrial heavyweight Caterpillar beat earnings estimates due to strong global demand but its shares tumbled 6.2% after management said first-quarter earnings would be the "high water mark" for the year and warned of increasing steel prices.

"We’ve seen quite a lot of companies announcing above-estimate earnings and their shares falling sharply," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

Fujito noted major financial shares such as Goldman Sachs and Citigroup as well as Google parent Alphabet, the first major tech firm to report earnings, had followed a similar pattern.

Corporate earnings are in solid shape, with analysts estimating 21.1% growth in the January-March quarter among US S&P 500 firms, according to Thomson Reuters data. A similar trend is expected globally.

"If shares are falling when corporate earnings are rising 20% and the economy is growing at 3%, the market is in trouble," Fujito said.

"The market reaction so far feels as if we are starting to see an end of its long rally since 2009. Investors could be thinking that the best time will be soon behind us."

Creeping gains in US Treasury yields are fuelling the fear.

The 10-year yield, a benchmark for global borrowing costs, has been driven steadily higher by a combination of concerns over inflation, growing debt supply, and rising Federal Reserve borrowing costs.

The 10-year yield rose to as high as 3.003% on Tuesday and last stood at 2.992%.

A break of its January 2014 high of 3.041% could turn investors even more bearish.

Fed Funds rate futures prices have been falling constantly this month, pricing in a considerable chance of three more rate hikes by the end of this year.

Rising US rates underpinned the dollar in the currency market.

The euro stood at $1.2226, not far from Tuesday’s low of $1.2182, a low last seen on March 1.

The dollar traded at ¥108.87, having jumped to a two-and-a-half-month high of ¥109.20 on Tuesday.

Against a basket of major currencies, the dollar index edged up 0.1%.

Oil prices slipped back from near three-and-a-half-year highs as talks between US President Donald Trump and French President Emmanuel Macron eased concern that Washington may reinstate sanctions against Iran, although Trump refrained from committing to staying in a nuclear deal struck in 2015.

Brent fetched $73.77 a barrel, little changed on the day. On Tuesday it rose to $75.47, its highest since November 2014. West Texas Intermediate (WTI) crude traded flat at $67.66.

WTI’s discount to Brent widened to as much as $6.32, the most since January 2, on rising US production.