Though recent data, particularly out of China, has fueled a rally in Asian equities since the start of the year, investors are expecting more headwinds for emerging markets due to an increasingly hawkish Fed.
“The positive sentiment towards emerging markets is not sustainable as the interest rate differential advantage in Asia’s favor is likely to reduce in the coming months,” said Frances Cheung, head of rates strategy for Asia ex-Japan at Societe Generale in Hong Kong.
The MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.3 percent after posting its second-biggest daily gain this year in the previous session.
Equities have had a good start to the week thanks to positive news out of the region’s two economic powerhouses, China and India.
Strong data out of China this week have sparked a fresh rally in Hong Kong stocks .HSI, while Indian shares climbed to a record high yesterday as investors regarded Prime Minister Narendra Modi’s landslide victory in the northern state of Uttar Pradesh as an endorsement for his economic reforms.
A worrying drop in global oil prices, however, has cast doubt on how much Asian policymakers are likely to raise interest rates this year to maintain their premium over U.S. rates.
Brent crude has lost more than 11 percent in the past three weeks despite a 1.2 percent bounce today.
U.S. oil prices jumped in early trading after industry data showed a surprise drawdown in U.S. crude stockpiles. West Texas Intermediate crude was up 1.4 percent at $48.40 a barrel.
Policy decisions at the Bank of England and the Japanese central bank along side a Dutch election vote within the next 36 hours were further reasons for investors’ caution.
Despite the fresh optimism in equities, currency markets were far more circumspect with the U.S. dollar edging higher against major rivals ahead of a much anticipated U.S. Federal Reserve rate hike.
Market attention will be squarely focused on Fed Chair Janet Yellen’s comments to gauge the future path of interest rates. The Fed is widely expected to raise its benchmark interest rate later in the global day, although just a few weeks ago such action had been viewed by markets as unlikely.
The dollar index was a touch higher at 101.70, extending a 0.7 percent rise in the past two sessions after a bout of profit taking at the end of last week, but it remained within well worn recent ranges.
“Of course, everyone is waiting for the Fed, so we’re expecting range-bound trading until we get some clear signals about expectations for the rest of the year,” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo. Markets are also awaiting a meeting of the Group of 20 finance ministers and central bankers in the German town of Baden-Baden starting on Friday, their first meeting since Donald Trump won the U.S. presidential election.
Gold XAU= rose 0.2 percent to $1200.70 before the Fed decision. – Reuters