Asian stocks set for worst monthly drop in three years as Fed, China loom

31 Aug 2015 | Author: | No comments yet »

Another rough markets week?.

Hong Kong – Global financial markets looked set for another rough week on Monday, with stocks and commodities falling ahead of data that could give clues on when the US will raise interest rates and surveys which are likely to point to further weakness in China. The Dow fell 1,000 points shortly after it opened Monday as global markets nosedived on fears about the scale of China’s economic slowdown rippled across the world.Tokyo: Asian stocks sagged on Monday after top Federal Reserve officials kept the door open for an interest rate hike in September and investors braced for China economic data this week.Wild swings in world financial markets this week have shown how events in China can potentially disrupt the Federal Reserve’s carefully scripted policy plans.

Mainland equities lost 3 percent on Monday while Dow futures tanked 200 points on reports that Beijing may finally halt its controversial market intervention. Confusion over policy direction in the world’s two largest economies sent global markets into turmoil early last week, with the wildest price swings in years pushing investors to the exits.

Global markets are bracing for Chinese data on Tuesday, which are expected to show the world’s second-largest economy is continuing to lose momentum. Fed vice chairman Stanley Fischer, speaking at the central bank’ conference in Jackson Hole, Wyoming, said recent volatility in global markets could ease and possibly pave the way for a rate hike. The turmoil, triggered by a rout in Chinese markets, also flagged a broader risk that the U.S. central bank may struggle to meet its inflation target until the rest of the world plays along. A report by The Financial Times over the weekend said that Beijing will abandon large-scale share purchases, sparking concerns over more declines for A-shares. US business surveys, factory orders, trade data and nonfarm payrolls will also be released this week, keeping investors on edge after one of the wildest trading weeks of the year.

The UK market is closed for a public holiday. “This is a market that is walking on glass; China seems to be the central theme feeding into a lot of these things but today the focus is very much on US interest rates again,” said, James McGlew, executive director of corporate stock broking at Argonaut in Australia. This jobs report is especially key because it plays a big role in the Fed’s decision — the central bank could raise its benchmark interest rates for the first time in a decade in September. Louis Fed president James Bullard also said he still favoured hiking rates next month, though he added that his colleagues would be hesitant to do so if global markets continued to be volatile into mid-September. So you look around the world and ask who can take up the slack, and really the answer is nobody,” said Kevin Logan, chief U.S. economist at HSBC Securities, in New York. “I don’t see how it’s possible that inflation will be picking up in the United States. MSCI’s broadest index of Asia-Pacific shares outside Japan shed more than 1 percent and is set to fall 10 percent this month, its worst monthly drop since May 2012.

If the American job market looks strong, it could push Fed committee members towards a September rate hike, despite the latest turmoil in the global stock market. Bullard referred to the global turmoil in financial markets last week, when a sharp selloff in Chinese shares, uncertainty over the Fed’s plans and an overdue correction on Wall Street sent equities sliding across the world. We’re just going to have a stronger dollar, falling commodity prices, growth prospects that aren’t that good, more competition from imports in the U.S. market so that labor won’t have any bargaining power and wages won’t be going up.” Only days ago, Fed officials had appeared ready to push interest rates higher in September based on a sense of “reasonable confidence” that inflation would rise to the central bank’s 2 percent target.

The Fed is waiting to see how data and markets unfold over the coming weeks before deciding whether to raise rates at its meeting in mid-September, Vice Chair Stanley Fischer told CNBC. Chinese stocks jumped for a second straight day, rising more than 4.0 per cent, after authorities said pension funds managed by local governments will soon start investing 2 trillion yuan (US$313.05 billion) in stocks and other assets.

The move was the latest response by Chinese authorities, including the People’s Bank of China, to shore up the economy after they cut rates, lowered reserve requirements and injected liquidity into the banking system. The recent market swoons follow a series of other shocks – crashing oil prices, weakness in Europe, the constant deflation threat in Japan – that have held down inflation globally. Up to now Fed officials have argued those problems would have only a passing effect on U.S. prices, even as they kept pushing the timeline for reaching their inflation goal further into the future.

Investors sold $5.9bn of emerging market assets between August 20 and 26, a sharp increase from $1.5bn the week earlier, Nomura fund flows data showed. While China’s stock markets seldom reflect the true nature of the economy, the plunge, coupled with Beijing’s unexpected currency devaluation in mid-August, has dented confidence in the government and added to fears that the economy may be at risk of slowing more sharply than earlier expected. An index for Asian high-yield credit has fallen sharply compared with a relatively steady performance in the investment grade index, according to Thomson Reuters data. Skittish markets will therefore be watching factory and service sector activity surveys from the world’s second-second largest economy on Tuesday, as well as US nonfarm payroll numbers due on Friday. “The US is not immune from international growth concerns but it is likely least affected, and we continue to expect USD outperformance,” strategists at Barclays wrote. “While we recently revised our Fed rate hike call to March 2016 from September 2015, we think it is even more likely that other major central banks will push back tightening or move toward outright easing.” The dollar was down 0.4% at ¥121.25 after rising to the week’s high of 121.76 on Friday following the Fed officials’ comments that kept prospects of a September hike alive. Some economists, however, question long-held views such as that rising employment will eventually drive up wages and inflation, pointing out that global forces now play a prominent role in that equation.

The pan-European FTSEurofirst 300 index rose 0.34 per cent to close at 1,435.13, and euro zone’s blue-chip Euro STOXX 50 index gained 0.18 per cent. The opening up of markets in former Soviet bloc countries, China’s entry into the World Trade Organisation, regional free trade pacts have all allowed capital and goods to move more freely, helping to even out and hold down costs. The market will watch Thursday’s policy meeting to see if the European Central Bank will be inclined to ease monetary policy further in the wake of the recent global markets turmoil, though no imminent change is expected. In fact, as U.S. imports have increased to 15 percent of the national output by the middle of last decade from around 10 percent in early 1990s, inflation has been tracking import prices more closely, with headline inflation over that period matching the increases in prices of non-oil imports. US crude was down 0.8% at $44.86 a barrel after jumping more than 6% on Friday on frenetic short-covering fuelled by violence in Yemen, a storm in the Gulf of Mexico and refinery outages.

A rebound in U.S. stock prices and a sharp upward revision in U.S. second quarter growth numbers may ease some fear that slow growth and volatility overseas will dull the U.S. recovery. But renewed disinflationary impulses from around the globe could still make the Fed more cautious and intensify the effort to better understand how inflation works.

German bond yields edged lower, defying the sudden surge in oil, as data showed consumer prices in Europe’s biggest economy had been weighed down by falling energy costs. Released before the Tokyo market open, the report showed a monthly fall of 0.6 percent, missing Reuters expectations for a 0.1 percent rise and coming in well below June’s revised 1.1 percent gain. Some researchers, for example, argue that “core inflation” – which strips out food and energy prices and is often used by bankers as their preferred gauge – may be less relevant in a world where futures contracts, global shipping and worldwide trade help even out retail level price swings for some of those goods. “I look at data and I think that we are in an unusual situation,” Michael Owyang, assistant vice president at the St. The Reserve Bank of Australia (RBA) holds a policy review on Tuesday, but the majority of analysts don’t expect any chance to the current 2 percent interest rate. The US dollar gained for a fourth straight session, buoyed by calmer financial markets and generally positive US economic data that supported the notion that the world’s largest economy was on a stable growth path.

Continued devaluation of the yuan could lead to much lower global inflation than currently forecast, and any mention of this in the statement would be significant,” commented Angus Nicholson, IG’s market analyst. Indian gross domestic product for April-June is expected around 8pm SIN/HK; median estimates are for a 7.4 percent rise in annual growth, a tad below the 7.5 percent rise seen in January-March, according to Reuters. Malaysian markets are closed on Monday but the ringgit may draw attention on Tuesday following an unprecedented show of public discontent against the government.

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