Asian stocks hit 1-year high as soft US data quells Fed hike talk

The dollar took a tumble and Asian stocks rose to one-year highs on Wednesday after surprisingly weak US services sector activity put paid to already slim chances of an interest rate hike by the Federal Reserve as early as this month.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.4 per cent, extending its chunky gains of 2.7 per cent over the last two days, to claim a level last seen in July last year.

“When people think there’s no immediate rate hike from the Fed, then Asia and emerging markets are the place to go to, as investors seek yields,” said Toru Nishihama, senior economist at Dai-ichi Life Research.

Japan’s Nikkei slid 0.7 per cent, however, as the yen gained sharply versus the dollar, putting more pressure on exporters in the world’s third-largest economy.

ISM data

The Institute for Supply Management’s index of non-manufacturing activity fell to 51.4, its lowest level since February 2010, from 55.5 the month before and well shy of the 55 estimate.

Given the strength in the service sector has been making up for softness in the manufacturing in the past year or so, the data was a blow to the case for the Fed to raise interest rates as soon as this month.

“The Fed now looks certain to keep rates on hold this month,” said Shuji Shirota, head of macro economics strategy group at HSBC in Tokyo.

Fed rate hike prospects

Comments from several Fed officials in recent weeks had boosted bets on a rate hike in coming months, but investors have had to scale back their expectations since Friday’s weaker-than-expected U.S. payrolls report.

San Francisco Fed president John Williams, speaking after the ISM data, also said he expects the Fed will raise rates gradually over the next few years.

“Recent hawkish comments from Fed officials were probably intended to warn markets against being too complacent about the chance of a rate hike, rather than to make markets fully price in a rate hike,” Shirota said.

US bond yields

US bond yields fell, with policy-sensitive two-year notes yield falling to 0.730 per cent, its lowest since Aug. 19, down from 0.853 per cent marked on August 29.

US interest rate futures price gained to indicate only about 15 per cent chance of a rate hike this month and just over 50 per cent even by December, compared to above 20 and 60 per cent, respectively, before the data were released.

Declining US yields undermined the dollar against other currencies and precious metals.

Dollar vs yen

The dollar, which had slumped 1.38 per cent on the yen on Tuesday, shed another 0.5 per cent to 101.48 yen.

The yen gained additional support from a media report that the Bank of Japan's board is struggling to agree on a common front in its planned policy review.

The euro maintained Tuesday’s 0.96 percent rise against the dollar, the biggest daily gain in three months on Tuesday and last stood at $1.1247.

A resurgent British pound rose to near eight-week high of $1.3445 on Tuesday and held firm at $1.3416.

Gold, crude oil

Gold rallied to $1,352.4 per ounce to near three-week highs on Tuesday, and last stood at $1,350.0.

The Australian dollar took a breather. It was last down 0.2 per cent at $0.7668 after GDP data largely met expectations, with Australia’s annual growth clocking its fastest pace in four years last quarter, clinching a remarkable run of 25 years without recession.

Oil prices kept some distance from three-week lows touched last week, maintaining a part of gains made after Saudi Arabia and Russia had agreed on Monday to cooperate in world oil markets, saying they will not act immediately but could limit output in the future.

Brent crude futures stood at $47.49 per barrel, up 0.5 per cent on the day and above its low last week of $45.32.

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