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Friday, September 29, 2023

Asian Shares Fall As Yuan Near 8-Month Low On Rate Risks

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Asian shares fell on Thursday after global central banks reaffirmed their resolve to beat inflation, warning rates may need to rise further, while the yen and yuan struggled to lift from lows amid jitters of intervention.

Europe is set for a lower open, with both EUROSTOXX 50 futures and FTSE futures off 0.1 per cent. Wall Street futures were up 0.1 per cent as investors await U.S. Personal Consumption Expenditures (PCE) data on Friday.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5 per cent with holidays in Singapore, India and Malaysia making for thinner trading.

Chinese blue chips fell 0.3 per cent and Hong Kong’s Hang Seng index slumped 1.3 per cent. Japan’s Nikkei, however, gave up earlier gains to be up 0.1 per cent

The onshore yuan eased to 7.2491 per dollar, just a whisker away from its eight-month trough hit a day ago. That was despite a stronger-than-expected central bank fixing, which investors read as an official attempt to rein in weakness in the currency.

“(The People’s Bank of China) might not mind the currency falling because it helps support the Chinese economy growth, but they probably don’t want it to fall too rapidly because then it looks a bit like a panic,” said Shane Oliver, chief economist at AMP in Sydney.

“Obviously, the central bank might try and slow that down, but it’s like when the tide is going out, they are sort of battling the falling tide.”

Overnight, U.S. shares were largely flat. The Nasdaq managed a small gain with support from tech stocks, with Apple closing at a record high, while the Dow closed slightly lower.

On Wednesday, Federal Reserve Chair Jerome Powell said the bank will likely raise rates further and did not rule out a July hike. Notably, he said he did not see inflation abating to the 2 per cent target until 2025.

“So there wasn’t really much of a surprise there, which explains why share markets hadn’t really fallen that much, despite it being a hawkish message,” said Oliver.

Indeed, two-year Treasury yields closed at 4.722 per cent after briefly spiking to 4.778 per cent, as bond markets continued to cast doubt on Fed’s hawkishness of two more hikes. They were up 2 basis points to 4.7451 per cent on Thursday.

Futures see about an 80 per cent chance the Fed will raise interest rates by 25 basis points in July, before holding rates steady for the remainder of the year.

European Central Bank President Christine Lagarde, on the other hand, cemented expectations for a ninth consecutive rise in euro zone rates in July. Markets have all but priced in two more rate hikes from the ECB this year.

By contrast, Bank of Japan (BOJ) Governor Kazuo Ueda reiterated that “there’s still some distance to go” in sustainably achieving 2 per cent inflation, the conditions the BOJ has set for considering an exit from ultra-easy stimulus.

The BOJ’s dovish policy stance has undermined the yen, which fell 0.1 per cent on Thursday to 144.56 per dollar, just a whisker away from an eight-month low of 144.62 hit overnight.

Markets are on edge for intervention from Japanese authorities, after increased verbal warnings from government officials this week that the yen’s decline may have been too rapid.

Investors are now awaiting the U.S. PCE index on Friday, the Fed’s favoured inflation gauge. Analysts polled by Reuters expect the core rate to be 4.7 per cent on a year-over-year basis, still well above the Fed’s 2 per cent target.

“Markets seem stuck in a holding pattern, watching in awe the inconsistencies between risk sentiment, yield curves, data surprises and inflation,” said Mark McCormick, global head of FX and EM Strategy at TD Securities.

“For U.S., disinflation is the main driver and sending the strongest directional H2 cue for the USD: choppy but lower.”

The soft yuan and yen have lifted the greenback more broadly, with the U.S. dollar up 0.2 per cent against a basket of major currencies on Thursday.

The dollar has fallen 0.5 per cent in the first half of the year after hitting a decade high last year.

Oil prices lost ground on Thursday. U.S. crude futures retreated 0.6 per cent to $69.13 per barrel, and Brent crude was down 0.6 per cent at $73.54 per barrel.


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