Asia stocks retreat after Fed tempers aggressive rate cut expectations

Reuters TOKYO | Updated on June 26, 2019 Published on June 26, 2019

Asian shares edged lower on Monday on fading hopes of a Fed rate cut. File Photo   -  Reuters

Dollar crawls up from 3-month lows on Fed officials' comments

Asian stocks retreated on Wednesday and the dollar inched up from three-month lows after Federal Reserve officials tempered expectations in the markets for aggressive monetary easing.

Fed Chair Jerome Powell on Tuesday said the central bank is “insulated from short-term political pressures,” pushing back against US President Donald Trump's demand for a significant rate cut. Powell, however, said Fed policymakers are wrestling with questions on whether uncertainties around US tariffs, Washington's conflict with trading partners and tame inflation require a rate cut.

Separately, St. Louis Fed President James Bullard told Bloomberg Television he does not think the US economy is dire enough to warrant a 50-basis-point cut in July, even though he pushed to lower rates last week.

Equity markets have rallied this month, with Wall Street shares advancing to record highs, after the Fed was seen to have opened the door to possible rate cuts as early as next month at is policy-setting meeting last week.

According to latest data from CME Group's FedWatch programme, federal funds futures implied that traders saw a 27 per cent chance of the Fed lowering rates by half a percentage point in July, compared to 42 per cent on Monday.

Trump said on Twitter on Monday that the Fed “doesn't know what it is doing,” adding that it “raised rates far too fast” and “blew it” given low inflation and slowing global growth.

Tracking overnight losses on Wall Street, Australian stocks dipped 0.15 per cent, South Korea's KOSPI shed 0.1 per cent and Japan's Nikkei retreated 0.6 per cent.

The Shanghai Composite Index edged down 0.15 per cent and Hong Kong's Hang Seng lost 0.1 per cent. MSCI's broadest index of Asia-Pacific shares outside Japan declined 0.2 per cent.

“While Powell's comments do not alter expectations that the Fed will ease sooner or later, they do leave a slightly negative impact on equities,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management.

“The focus is now on the G20 summit. Market expectations for a meaningful breakthrough being achieved in US-China trade talks are quite low, so any signs of an improvement could bode well for risk sentiment.”

The US hopes to re-launch trade talks with Beijing after Trump and his Chinese counterpart Xi Jinping meet in Japan during the G20 summit on Saturday but Washington will not accept any conditions on tariffs, a senior administration official said on Tuesday.

The two sides could agree not to impose new tariffs as a goodwill gesture to get negotiations going, the official said, but it was unclear if that would happen.

The dollar index against a basket of six major currencies was up 0.15 per cent at 96.289, extending modest overnight gains.

The index had bounced back from 95.843 on Tuesday, its lowest level since March 21, following comments from the top Fed officials.

The dollar added 0.2 per cent to 107.385 yen after a rebound from a near six-month low of 106.780.

The greenback had sunk to the six-month trough as the yen, a perceived safe haven, had drawn bids in the face of brewing US-Iran tensions.

The euro slipped 0.05 per cent to $1.1357 after being nudged off a three-month peak of $1.1412.

US crude oil futures advanced nearly 2 per cent to touch a four-week high of $59.03 per barrel after data showed a decline in US crude stocks.

The US data helped underpin a crude market already buoyed by worries over potential US-Iran conflict.

Spot gold slipped from a six-year high of $1,438.63 an ounce after the comments from Fed officials trimmed expectations for a rate hike in July.

Gold was last down 0.65 per cent at $1,413.69 an ounce, headed to snap a six-day winning streak. The precious metal was still up 8.5 per cent so far this month.

Published on June 26, 2019
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