Asian stocks tum­ble, safe as­sets shine as oil re­treats

The Pak Banker - - MARKETS/SPORTS -

Asian shares tum­bled on Wed­nes­day as oil prices dropped for a third day, prompt­ing in­vestors to seek shel­ter in safe-haven as­sets and lift­ing bonds and gold to multi-month highs.

The MSCI's broad­est in­dex of Asi­aPa­cific shares out­side Ja­pan fell 2.1 per­cent?led by a 2.7 per­cent fall in Hong Kong shares. Ja­pan's Nikkei lost 3.2 per­cent, wip­ing out al­most all of its gains made af­ter the Bank of Ja­pan on Fri­day had an­nounced it would in­tro­duce neg­a­tive in­ter­est rates. Overnight, the U.S. S&P 500 in­dex fell 1.9 per­cent.

The sell­off is likely to ex­tend into the Euro­pean ses­sion, with spread-bet­ters ex­pect­ing Ger­many's DAX and France's CAC 40 lose as much as 1.1 per­cent each and Bri­tain's FTSE 0.9 per­cent.

"There's no sign of im­prove­ment in the oil mar­ket. De­mand is slow­ing in many emerg­ing mar­kets and in the U.S, which is the world's big­gest con­sumer, oil in­ven­to­ries stood high," said Shuji Shi­rota, head of macro eco­nomic strat­egy at HSBC in Tokyo.

Brent crude fu­tures, the world's oil bench­mark, fell 0.7 per­cent to $32.48 per bar­rel, ex­tend­ing losses so far this week to more than 6 per­cent. U.S. crude fu­tures slipped 0.5 per­cent. Hopes for an agree­ment to cut pro­duc­tion dimmed this week as no deal has emerged and talks be­tween Rus­sia's en­ergy min­is­ter and Venezuela's oil min­is­ter on Mon­day failed to re­sult in any clear plan to re­duce out­put.

Oil prices have fallen about 70 per­cent in the past 18 months, largely due to a grow­ing sup­ply glut but also ex­ac­er­bated by cool­ing eco­nomic growth in China and other emerg­ing mar­kets.

Al­though a pri­vate sur­vey on China's ser­vices sec­tor on Wed­nes­day showed growth picked up to a six-month high in Jan­uary, that was a drop in the bucket in mar­kets full of pes­simism on the global econ­omy. The gloom per­vad­ing mar­kets bol­stered the al­lure of govern­ment debt. As U.S. debt prices jumped, the 10-year U.S. yield hit a 10-month low of 1.828 per­cent. Un­cer­tainty around global growth has prompted in­vestors to slash back their ex­pec­ta­tion of fu­ture U.S. rate hikes, with Fed­eral funds rate fu­tures now pric­ing in only about a 50 per­cent chance of just one rate hike this year.

That stood in stark con­trast to the pro­jec­tion by the Fed's pol­icy board mem­bers that rates could rise four times. Ja­panese bond yields also kept fall­ing as the mar­ket deals with the ram­i­fi­ca­tions of the BOJ's de­ci­sion to charge in­ter­est on a por­tion of ex­cess re­serves, with the 10-year JGB yield hit­ting a record low of 0.045 per­cent. The two-year JGB yield sank to mi­nus 0.190 per­cent. Dwin­dling bond yields around the globe made pre­cious me­tals, which pays no in­ter­est, at­trac­tive as­set for many in­vestors, es­pe­cially at a time when cen­tral banks in Ja­pan and Europe are now adopt­ing neg­a­tive in­ter­est rates.

Gold hit a three-month high of $1,130.90 per ounce on Tues­day and last stood at $1,128.3. In the cur­rency mar­ket, the safe-haven yen strength­ened 0.3 per­cent against the dol­lar to 119.56 while the euro was lit­tle changed at $1.0918.

The Chi­nese yuan slipped to its weak­est level in three weeks in off­shore trade to 6.6451 yuan to the dol­lar, al­though it was sta­ble in a more tightly-con­trolled on­shore mar­ket. Bets on fur­ther weak­ness in the yuan gath­ered mo­men­tum in de­riv- ative mar­kets, with its three-month im­plied volatil­ity ris­ing to record lev­els.

The prospects of a weaker yuan put pres­sure on Asian cur­ren­cies. The Korean won fell one per­cent to its low­est level since July 2010, chang­ing hands at 1,221.1 won to the dol­lar.

"We are bear­ish on Asia FX this year and look to buy USD/Asia FX on dips," said Qi Gao, an emerg­ing Asian cur­rency strate­gist for Sco­tia­bank in Hong Kong.

"A re­cov­ery in China, mod­est rise in oil prices, freez­ing of the Fed funds rate and a large size of QE or QQE by the ECB and BOJ could send Asian cur­ren­cies higher. But it does not seem pos­si­ble in the first half," Gao said.

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