Asian stocks rebound after two days of losses
MSCI’s broadest index of Asia-Pacific shares outside Japan increases 0.3% while US recession fears remain
Tokyo — Asian shares bounced back on Tuesday after two days of losses as US 10-year Treasury yields edged higher, but the outlook remained murky as investors weighed the odds of whether the US economy is in danger of slipping into recession.
MSCI’s broadest index of Asia-Pacific shares outside Japan rebounded 0.3% after losing 1.4% in the previous session.
Australian shares were flat, while Japan’s Nikkei jumped 1.8% after recording its biggest drop since late December on Monday.
China’s blue-chip CSI300 and Hong Kong’s Hang Seng index also rose, by 0.3% and 0.5%, respectively.
Wall Street shares were little changed on Monday with the S&P 500 ending with a small loss of 0.08%.
US stock futures rose, with E-Minis for the S&P 500 tacking on one-third of a percent.
Investors have been spooked by sharp falls in US bond yields and an inversion of the US Treasury yield curve, which is widely seen as an indicator of an economic recession.
The 10-year US Treasury yield edged up to 2.430%, having shed five basis points on Monday.
It has fallen about 18 basis points since the Federal Reserve last week ditched projections for raising rates this year and announced the end of its balance sheet reduction, citing signs of an economic slowdown.
“The US yield curve continues to invert,” said Michael Every, Hong Kong-based senior Asia-Pacific strategist at Rabobank.
“This is not a healthy sign, as bond-market watchers should know and equity-market obsessives should rapidly learn,” he said in a note. “How much further will this run before we see markets starting to do the same?”
The 10-year yield fell below the yield for three-month bills on Friday for the first time since 2007, inverting the yield curve.
San Francisco Fed researchers have said that the difference in those two maturities was the most useful for forecasting a recession.
“I think the market has overreacted to the yield curve inversion because the San Francisco Fed has said it is the most reliable indicator,” said Hiroshi Nakamura, senior manager of investment planning at Mitsui Life.
“I expect some correction to the latest rally in bonds. For now we have to see this week’s auctions,” he said.
Factoring in a rate cut
The treasury department will sell $113bn in coupon-bearing supply this week, including $40bn in two-year notes on Tuesday, $41bn in five-year notes on Wednesday and $32bn in seven-year notes on Thursday.
Investors will also be watching Fed policymakers scheduled to speak on Tuesday.
US economic growth could be “pretty weak” in the first quarter but will likely be much closer to 2%-2.5% for the rest of the year, but a central bank pause is the responsible thing to do, Fed Bank of Boston president and CEO Eric Rosengren said at a conference in Hong Kong.
Fed funds rate futures are now fully factoring in a rate cut later this year, with about an 80% chance of a move priced in by September.
In the currency market, the fall in US yields undermined the dollar’s yield attraction.
The euro stood at $1.1315, having gained a tad on Monday after Germany’s IFO Institute said its business climate index rose to 99.6, beating a consensus forecast of 98.5 and ending six consecutive months of decline.
The dollar was a shade higher at ¥110.10, after having hit a one and a half month low of 109.70 on Monday.
“While dollar/yen hasn’t fallen greatly and things aren’t in panic mode, a sense of caution about where things are going has taken hold,” said Shusuke Yamada, chief Japan currency and equity strategist at Bank Of America Merrill Lynch.
The British pound stood at $1.3195, erasing small gains made after legislators voted to wrest control of the Brexit process from Prime Minister Theresa May’s government.
May said on Monday there was not yet enough support to put her Brexit deal to a third vote in parliament.
Oil prices hovered below their recent four-month peaks, as the prospect of tighter US crude supply was offset by concerns about a slowdown in global economic growth.
US crude futures traded at $59.21 per barrel, up nearly 0.7%, a tad below Thursday's high of $60.39, its highest since mid-November.
Brent futures were up 0.2% at $67.33.
Gold was slightly lower at $1,320.90, not far off a near one-month peak of $1,324.60 scaled during the previous session.