Wednesday, 3 August 2016

Bonds shaken by stimulus doubts, dollar on defensive

Asian shares fell on Wednesday while the yen lorded over a weakened U.S dollar as fears that the Bank of Japan may retreat from its massive bond-buying campaign added to a shakeout in debt markets globally.

Worryingly for energy shares, the broad-based decline in the dollar was still not enough to spare U.S. crude oil from its first finish under $40 a barrel since April.

Adding to the jittery mood was a renewed selloff in bank stocks following stress tests in Europe.

MSCI's broadest index of Asia-Pacific shares outside Japan  slipped 1 percent, backing away from its recent one-year peak.

Japan's Nikkei .N225 lost 0.9 percent as the rising yen pressured exporter stocks while financials slid 2.7 percent.

Shanghai .SSEC was near flat, with a private survey showing growth in China's services sector cooled in July and companies shed staff for first time in four months.

The sharpest moves have been in sovereign bond markets where a sudden spike in yields stirred speculation that a multi-year bull run in prices might finally be nearing its end.

While Japanese bonds steadied on Wednesday they have still suffered the worst sell-off in over three years as investors feared the BoJ was out of easing ammunition and might leave it to fiscal policy to stimulate the economy.

Tokyo on Tuesday approved 13.5 trillion yen ($132 billion) in fiscal measures and the IMF urged Japan to mix fiscal stimulus with labour market reforms.

Bond bulls were worried the Bank of England might also under-deliver at its policy meeting on Thursday, putting the onus on debt-funded government spending to support growth.

"With Japan and the UK set to ease fiscal policy, it will be important to watch whether we are at the beginning of a global policy re-pivot away from monetary easing," wrote analysts at ANZ in a note.


The ripples spread all the way to U.S. Treasuries where 30-year yields hit their highest since July 21 even though domestic data were generally soft.

Disappointing auto sales slugged shares in Ford  and General Motors, which both dropped more than 4 percent.

The Dow Jones Industrial Average  ended Tuesday down 0.49 percent, while the S&P 500 .SPX lost 0.64 percent and the Nasdaq . 0.9 percent.

The recent outbreak of weaker U.S. data has further pushed back expectations for when the Federal Reserve might hike its rates -- the market is not fully priced for a move until well into 2018 -- and taken a heavy toll on the dollar.

The dollar touched a near six-week trough against a basket of currencies .DXY, while the euro reached its highest since mid-July around $1.1230 EUR=.

Against the yen, the dollar was at 101.19 yen JPY= having fled from 105.33 in just four sessions.

In commodity markets, oil prices steadied in Asia but remained vulnerable to worries about a glut in both crude and refined product.

Brent crude  edged up 19 cents to #41.99 and away from four-month lows on Wednesday.crude edged up 25 cents to $39.76 a barrel, but was still under the psychological $40 level.

Reference: Wayne Cole

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