Asian Shares Slip As Prospects For Fed Tapering Rise

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Asian stocks were weaker, while U.S. Treasury yields held near two-year highs as signs of improvement in the U.S. job market and rising consumer prices cemented expectations that the Federal Reserve will start reducing its stimulus next month.

A man walks in front of an electric board displaying movements of the Japanese yen's exchange rate against the U.S. dollar and Euro in Tokyo

* Asian share down, but less than Wall St peers

* U.S. jobs, inflation fuel expectation of Fed tapering in Sept

* Other U.S. data mixed, spurring unwinding in USD long positions

* Bonds under pressure globally also on signs of improvement in Europe

* Oil prices near 4-month peak on worries over unrest in Egypt

Asian stocks were weaker, while U.S. Treasury yields held near two-year highs as signs of improvement in the U.S. job market and rising consumer prices cemented expectations that the Federal Reserve will start reducing its stimulus next month.

The dollar wallowed near seven-week low, however, as signs of improvement in Europe and elsewhere undercut the perceived relative strength of the U.S. economy, especially in light of some weak U.S. earning results, as well as disappointing factory data.

Other U.S. data released overnight showed China and Japan -- the two largest foreign holders of U.S. debt -- were at the forefront of a $66 billion exodus from long-term US Treasuries in June, dumping a net $40 billion as they braced for an eventual end in the Fed's bond buying.

"I'd say the markets are pricing in an 80 to 90 percent chance that the Fed will announce tapering in September, although I suspect the Fed will try to send a message to curb the rise in bond yields," said Arihiro Nagata head of foreign bond trading at Sumitomo Mitsui Banking Corp.

Tokyo's Nikkei share average fell 0.8 percent while MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.2 percent.

"It's difficult to be an exception and gain when global markets are sluggish," said Rhoo Yong-seok, an analyst at Hyundai Securities.

The falls were moderate compared to Wall Street, where Standard & Poor's 500 Index shed 1.4 percent, its biggest fall since mid-June to five-week lows.

U.S. shares were pummelled by weak earnings and outlook from Walmart and Cisco, with disappointing sales at the world's largest retailer stoking worries about the strength of U.S. consumers, particularly low-income households that do not benefit from asset price gains.

U.S. industrial output also fell short of expectations, though that did not hinder rising expectations of tapering of the Fed's stimulus as the central bank has said it will focus on improvement in jobs to decide on its policy.

The number of Americans filing new claims for jobless benefits fell to an almost six-year low last week, while rising consumer prices indicated reduced risk of too low inflation.

Benchmark U.S. 10-year yields hit two-year high of 2.823 percent on Thursday and last stood at 2.775 percent, with investors expecting it to head for the three percent mark.

Foreign investors sold long-term U.S. securities for a fifth straight month in June, and the $66 billion sell-off was the biggest on record, surpassing the $59bn of outflows in November 2008 when the U.S. Investment bank Lehman Brothers collapsed, U.S. Treasury department data showed on Thursday.

While the June data could fan fears of more foreign selling, analysts noted higher yields tend to attract funds and that in recent weeks Japanese investors have been buying foreign debt, most of which was likely to have been Treasuries.

Analysts said global bond yields were also lifted by signs of improvement in Europe. Data showed on Wednesday the euro zone's two largest economies, German and France, grew faster than expected in April-June, which helped to pull the entire euro zone out of recession.

German bund yields rose to the highest level since March 2012 while Italian bonds' yield spread over bunds fell to two-year lows in a sign that the euro zone is slowly healing from the debt crisis..

That also helped to lift the euro 0.7 percent on Thursday to $1.3350, near double top around $1.34 hit in June and August, pushing the dollar index down near a seven-week low hit last week.

The dollar also lost momentum against the yen, trading at 97.38 yen, off Thursday's high of 98.66 yen.

Earlier this year, investors had piled up dollar long positions on the view that the Fed will be way ahead in tightening its policy among other major central banks.

As the dollar eased, gold prices hit a two-month high of $1,369.40 overnight and last stood at $1,363 while silver surged more than 5 percent to three month high of $23.15.

Brent oil prices held near four-month peaks on fears that escalating violence in Egypt could affect the Suez Canal or spread in the Middle East, where some supplies are already disrupted.

Some market players also voices concern that further escalation in Egypt's turmoil could lead to a broad selling in risk assets.

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