Hong Kong leads Asian stocks lower, oil fragile at 5-month lows

Asian shares slumped on Thursday as the Hong Kong market was hit for the second straight session following a day of massive street protests, while oil prices flirted with five-month lows due to higher US crude inventories and a bleak demand outlook.

Fading hopes that the US and China will clinch a deal on the sidelines of a Group of 20 summit meeting in Osaka on June 28-29 also hurt sentiment and drove bond yields down.

“There's not even a plan of ministerial-level bilateral meetings ahead of the G20 summit. You can't expect any major agreement,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities.

European stocks are expected to fall, with futures Britain's FTSE and Germany's DAX down about 0.2 per cent.

MSCI's broadest index of Asia-Pacific shares outside Japan fell as much as 1 per cent and was last off 0.6 per cent. Hong Kong's Hang Seng Index tumbled 1.8 per cent at one point following Wednesday's 1.7 per cent fall.

The selling pressure in Hong Kong came after legislation that would allow citizens to be extradited to China triggered a mass protest and some of the worst unrest seen in the territory since Britain handed it back to Chinese rule in 1997.

Japan's Nikkei lost 0.8 per cent while US stock futures slipped 0.2 per cent in Asia, following small losses the previous day when the S&P 500 shed 0.20 per cent.

Oil hovered near five-month lows, pressured by another unexpected rise in US crude stockpiles, as well as the bleaker outlook for demand posed by prospects of a protracted trade war between China and the US.

Brent crude futures barely moved at $60.06 after a 3.7 per cent slide on Wednesday to $59.97 a barrel, the international benchmark's lowest close since January 28.

US West Texas Intermediate crude futures stood at $51.12 per barrel, compared to the previous day's close of $50.72 a barrel, its weakest settlement since January 14.

“It is a bit of mystery that oil prices are so low when global stock prices remain relatively supported. But one thing is certain. Weaker oil prices will curb inflation and boost rate cut expectations,” said Daiwa's Kabeya.

Government data showed on Wednesday US consumer prices barely rose in May, with the core annual inflation slowing to 2.0 per cent, compared to a peak of 2.4 per cent last July, adding to the growing expectations of a Federal Reserve rate cut in coming months.

Investors will be looking to what Fed policymakers will say after its next policy meeting on June 18-19, with the Fed Funds rate futures pricing in a 25-basis-point rate cut for the subsequent policy review on July 30-31.

That is completely at odds with the Fed's projection three months ago, when policy makers saw gradual rate hikes in coming years.

“The US real economy has not worsened that much. But given market expectations, the Fed will have no choice but to cut rates... It will take action as an insurance against potential downside risks to the economy as a Sino-US trade deal looks unlikely for now,” said Kozo Koide, chief economist at Asset Management One.

The 10-year US Treasuries yield dipped to 2.103 per cent , near Friday's 2.053 per cent, its lowest level since September 2017.

Bond yields also fell in Asia. Long-dated Japanese government bond yields hit their lowest levels since August 2016, with 20-year yield down 2.5 basis points at 0.220 per cent, before they rose back on a weak 30-year bond auction.

In Australia, long known for its high-yield currency, rates fell to record lows, with the three-year yield now slipping below 1 per cent after the country's jobs data pointed to another interest rate cut in July to follow one just last week.

In the currency market, the yen gained 0.2 per cent to 108.32 to the dollar as risk sentiment soured, while the Australian dollar dropped 0.25 per cent to $0.6910.

The euro stood little changed at $1.1293, having taken a hit on Wednesday after US President Donald Trump said he was considering sanctions over Russia's Nord Stream 2 natural gas pipeline project and warned Germany against being dependent on Russia for energy.

The British pound is on the back foot after British lawmakers defeated an attempt led by the opposition Labour Party to try to block a no-deal Brexit by seizing control of the parliamentary agenda from the government.

Sterling fetched $1.2688, not far from this week's low of $1.2653.

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