Asian stocks falter as Fed signals December rate rise

Reuters: Asian stocks snapped a two-day rising streak and fell on Thursday after the US central bank hinted at a December interest rate hike, sending short-term US bond yields to 4-1/2-year highs and pushing the dollar broadly up.

A December US interest rate increase, ordinarily a sign of a healthy global economy, would now come at the worst possible time for export-oriented Asian countries which are grappling with the twin effects of a slowing China and shrinking global trade.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.4%, led by a 1% fall in Australian shares. While it has risen 12% since end-September, it is still down 10% so far this year.

“Emerging markets are facing some stiff headwinds particularly in the form of a historic China transition away from manufacturing-led growth and an entrenched slowdown in global trade,” said Jeremy Lawson, senior international economist at Standard Life Investments.

In fresh signs that Asian countries were feeling the heat, central banks from Australia to Thailand voiced caution at their scheduled policy meetings this week while retail sales in Hong Kong fell for the seventh consecutive month.

In her first public comments since the Fed’s meeting last week, Federal Reserve Chair Yellen said the US was ready for higher interest rates if upcoming economic data justified them.

“If the incoming information supports that expectation then our statement indicates that December would be a live possibility,” she said.

Her measured optimism was in direct contrast with the disappointing state of affairs for company earnings in Asia.

So far, September quarter net income for companies in Asia-ex Japan has missed consensus estimates by 6.5%, according to Morgan Stanley while Japan, a relatively bright spot so far, has also faltered.

Wall Street shares also slipped on Wednesday, with S&P 500 Index falling 0.4%. Futures were pointing to a weak start.

Tomoaki Shishido, fixed-income strategist at Nomura Securities, said: “Her comments confirmed that a rate hike in December is the Fed’s base case scenario.”

US economic data on Wednesday supported Yellen’s guarded optimism, with private employers hiring steadily in October and a jump in new orders buoying activity in the services sector.

The US bond market reacted promptly, with the policy-sensitive US two-year notes yield rising to 0.850% in Asian trade on Thursday, its highest level since April 2011. It has gained nearly 30 bps since early October.