In the last several weeks, reports have confirmed the euro zone and Japanese economies are shrinking, causing dealers to erase expectations for interest rate increases and for emerging markets investors to prepare for a potential backlash.
Asian stocks rose, led by Japan’s Nikkei share average .N225, which jumped 1.8% as investors looked for bargains after a recent market sell-off. Stock markets are also hoping that slumping oil and commodity prices will shore up faltering consumer demand in key export markets such as the United States.
Fears about a protracted global slowdown have caused oil prices to reflect a much lower so-called demand premium, as top consumers like China ratchet down energy imports, though on Monday US light crude prices climbed almost $1 to $114.72 a barrel on threats to supply in the Gulf of Mexico from a tropical storm.
Still, the overarching trend for lower commodity prices and a stronger dollar remained firmly in place. “Fresh weakness in the European economic data and the easing inflation threat given the sharp fall in oil prices had the market shifting its focus to growth from inflation in recent weeks,” said Nizam Idris, currency strategist with UBS in Singapore. “This has helped the US dollar, not due to any strong US macroeconomic data, but more due to the incremental weakness in the other major economies,” Idris said in a note.
Outside of Japan, the MSCI index of Asia-Pacific stocks was largely unchanged, after earlier slipping to a fresh 17-month low. Australia’s benchmark S&P/ASX 200 index rose 0.8%, Hong Kong’s Hang Seng index .HSI was largely unchanged as higher-than-expected earnings from Ping An Insurance, China’s second-largest insurer, were overshadowed by a profit warnings from the world’s biggest contract manufacturer of cellular phones, Foxconn International Holdings.
FOREX
The dollar was down 0.2% against the yen after touching a seven-month high on Friday above 110.60 yen. The euro rose 0.3% to $1.4731, after posting its fifth weekly loss against the resurgent US dollar. Since mid July when oil prices peaked, the euro has tumbled more than 8% to the lowest since February. After crude’s gains this year were cut by two thirds in the past month, investors have slashed their exposure to the energy sector and put money back into US assets.
Last week, energy sector funds saw redemptions of more than $1 billion, money flowed out of Middle East and Africa funds for the first time this year and Brazil equity funds suffered net outflows for the tenth consecutive week, according to EPFR Global, a Boston-based firm that tracks $10 trillion in assets. Asset-allocation strategists with JPMorgan said investors should keep betting on government bonds and expect US stocks to outperform European equities in the current environment of slowing global growth.
They also expect the US dollar to continue strengthening against the euro, Australian dollar and New Zealand dollar. “Markets are sensing that global demand is weakening and that economies outside the US are bearing the brunt of this weakness. Even emerging markets growth, which showed remarkable resilience in the H1, is at risk of falling below trend,” the strategists said in a weekly note. “We continue to position for the intensification of growth weakness outside the US through the currency markets.”
In the bond market, Japanese government bond futures rose on expectations the Bank of Japan would keep rates on hold in coming months with the economy possibly already in a recession. At a two-day meeting starting on Monday, the BOJ is expected to downgrade its view of the economy and keep interest rates on hold at 0.5%. September futures 2JGBv1 rose 0.06 point to 137.75, in sight of a four-month high of 138.12 hit last week. The benchmark 10-year yield edged down half a basis point to 1.450%, near a four-month low of 1.415% touched last week.
Gold prices rose 1.2% to $795.30 an ounce in the spot market on the recovery in oil prices. The yellow metal slumped 8.2% last week, its biggest plunge since 1983, triggering a broad decline in metals prices. (Reuters)
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