Asian shares decline on guarded Fed, yen rises after BoJ holds rates unchanged

Asian shares extended declines on Thursday after the US Federal Reserve signalled a higher bar to further easings, while the Bank of Japan also held off from offering more stimulus as some had hoped.

The Fed cut rates for the second time this year as global growth risks intensified, forcing policy-makers around the world to step up efforts to stimulate their economies. Earlier in the day, the BoJ kept policy steady as expected, though there were some expectations the Japanese central bank would ramp up its already massive stimulus.

Asian equities were already on the back foot after Fed Chairman Jerome Powell took a more guarded approach to any further reductions in borrowing costs.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.6 per cent. Hong Kong shares shed 1.36 per cent, but Japan's Nikkei rose 0.43 per cent.

The pan-region Euro Stoxx 50 futures were down 0.06 per cent, German DAX futures were off 0.1 per cent, and FTSE futures lost 0.27 per cent.

The yen rose from a seven-week low versus the dollar and jumped against the Australian dollar after the BoJ's decision.

Central banks around the world have been loosening policy to counter the risks of low inflation and recession. Easier monetary policy has generally supported equities.

However, some analysts argue that a bond market rally has gone too far, saying yields have fallen too fast and curves flattened too much. Others are worried about the growing amount of sovereign debt with negative yields.

“There were large yen-buying orders before the BoJ, and that just carried through,” said Tohru Sasaki, head of Japan markets research at J.P. Morgan Securities in Tokyo.

The BoJ maintained its pledge to guide short-term interest rates at minus 0.1 per cent and the 10-year government bond yield around 0 per cent. While it signalled the chance of expanding stimulus as early as its next policy meeting in October, some speculators had bet the Fed's rate cut on Wednesday would nudge the BoJ into action on Thursday.

The yen rose around 0.5 per cent to 107.92 per dollar and gained around 1 per cent to 73.26 versus the Australian dollar .

Investors will closely watch BoJ Governor Haruhiko Kuroda's post-decision press conference later on Thursday to gauge whether the central bank is likely to act before the year-end.

US stock futures fell 0.28 per cent on Thursday. The S&P 500 reversed losses to end 0.03 per cent higher after Powell said he did not see an imminent recession or think the Fed will adopt negative rates.

The Fed cut interest rates to 1.75 per cent-2.00 per cent in a 7-3 vote, but signalled further cuts are unlikely as the labour market remains strong.

The rate cut was widely expected, but the split vote has raised some concern about predicting the future path of monetary policy.

So-called dot-plot forecasts from all 17 policy-makers showed even broader disagreement, with seven expecting a third rate cut this year, five seeing the current rate cut as the last for 2019, and five who appeared to have been against even Wednesday's move.

“This is a small positive for share prices as long as there is no recession,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors in Sydney.

“The only problem is a 25 basis-point cut was already expected, and the comments and dot-plot forecasts were not as dovish as the market hoped. I think the Fed will have to cut again. There are still some risks from the yield curve.”

The yield on benchmark 10-year Treasury notes erased gains and fell to 1.7822 per cent, while the two-year yield rose to 1.7563 per cent.

The spread between two- and 10-year Treasury yields, the most commonly used measure of the yield curve, was near the lowest since September 9.

The curve inverted on August 14 for the first time since 2007, when long-term yields traded below short-term yields, a widely accepted indicator of coming recession.

Elsewhere in the currency market, the Aussie fell 0.6 per cent to $0.6790 after data showed the nation's jobless rate rose slightly to 5.3 per cent in August, bolstering expectations for the central bank to cut rates.

US crude futures rose 0.31 per cent to $58.29 per barrel. Oil markets have stabilised after attacks in Saudi Arabia over the weekend triggered a supply shock and sent prices soaring, but the volatility is still a risk as West Asia tensions remain high.

Washington has blamed Iran for the attacks, a charge which Tehran denies. US Secretary of State Mike Pompeo has said the strike was “an act of war.”

Sterling traded at 88.53 pence per euro, near its strongest level since May 30. The pound was little changed at $1.2477.

Investors are awaiting a Bank of England policy meeting later on Thursday. The BoE is expected to keep rates unchanged, but uncertainty about how the UK will exit from the European Union has complicated the outlook for monetary policy.

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