Asian markets continue retreat from risk

Wednesday 04.15 GMT. Asian stocks are again in retreat as a plunge in US home sales and a further slowdown in Japan’s export growth fuel concerns about a waning global economic recovery.

The MSCI Asia Pacific Index is trading 0.9 per cent lower as investors look toward the possibility of a double-dip recession. The index has fallen 9.6 per cent from its high this year in mid-April as risk aversion prevails.  

Japan’s Nikkei 225 is down 1.1 per cent at its lowest point since April last year, moving deeper into a bear market. Australia’s S&P/ASX 200 is off 0.6 per cent. South Korea’s Kospi is down 0.5 per cent after data showing consumer confidence has fallen for the first time in five months.

Toyota Motor is leading declines in Tokyo, with shares of the world’s largest automaker down 1.9 per cent. Canon is off 1.9 per cent. Samsung Electronics, the world’s largest technology company by sales, is down 1.3 per cent in Seoul while LG Electronics is 2.8 per cent lower. In Australia, BHP Billiton, the largest mining company in the world, is down 0.7 per cent amid lower materials prices.

In the US, sales of existing homes fell 27.2 per cent in July to the lowest level for 15 years – well past consensus expectations of a 12 per cent decline. In Japan, figures show that export growth cooled for a fifth month in July as the stronger yen threatens the price competitiveness of Japanese products abroad.

The yen is a bit weaker against the US dollar, trading at Y84.42 after rising on Tuesday to Y83.57, its strongest level since 1995. Against the euro, the yen is trading at Y106.87 after touching Y105.41, a nine-year low, on Tuesday.

Tokyo traders are complaining about the government’s slow response to the currency’s ascent.

Since the yen has started to sky-rocket, Yoshihiko Noda, the financial minister, has only reiterated that he is “watching closely”. Naoto Kan, prime minister, has said that he is worried about the yen’s quick rise.

“The balance of the commentary still suggests they’re not prepared to start intervening aggressively,” said Paul Mackel, global markets currency strategist at HSBC. “That said, it does seem that there is slightly more notable concern among policy-makers.”

Investors in Japan are disappointed that the government has not yet formulated any kind of yen intervention or stimulus plan. Raghav Subbarao, currency strategist at Barclays, says: “The continuing inaction from Japanese policymakers seems to have led to a reduction in the effectiveness of verbal intervention.”

Data from EPFR Global, which tracks fund flows, show that investors last week had removed all the funds they put into Japanese equities in 2010, and are moving into safer assets. The yen has been a beneficiary, while Japanese shares have fallen to one-year lows.

Those flows out of risk on Tuesday pushed oil to its lowest price in more than two months, and the FTSE All-World index down 1.3 per cent. A broad index of European shares was down 1.6 per cent to a one-month low, while the S&P 500 index was down 1.5 per cent.

The Richmond Fed’s index was closely watched, coming in at 11, versus 16 the previous month – though higher than the 8 forecast by economists. Last week, the Philadelphia branch’s own index of factory activity slipped to negative levels and sparked a multi-day sell-off, as it augured a potential dip in the August reading of the broader Institute of Supply Management’s index. The Chicago Fed’s index is due next week.

“Things appear to have come to a head...with markets braced at the edge of a precipice ahead of key US economic data likely to further unnerve investors already concerned by the extent of impending slowdown,” said Andrew Wilkinson, senior market analyst at Interactive Brokers.

The collapse in risk appetite was aided in part by worries about the eurozone too, which has been relatively stronger of late. Benchmark UK gilts hit an all-time low yield for the first time this year, below 2.90 per cent, while benchmark German Bunds hit new all-time low yields once again. The Bund’s spread versus Irish bonds saw its crisis high.

Though fears for the global economy are not new, economists at Goldman Sachs said economic expectations were not yet low enough – which equity and bond yield traders seemed to agree with through their continued downward adjustment.

“[The] forecasting community has only partially caught up with the deterioration in the numbers,” wrote Jan Hatzius, chief US economist at Goldman, in a note.

Mr Hatzius argued that the inevitable adjustments “are likely to trigger downgrades to consensus earnings forecasts toward our strategists’ more cautious views, as well as a return to large-scale asset purchases or other forms of ‘unconventional’ monetary policy by the [US Federal Reserve].”

Factor to watch: With a GDP revision due on Friday, it should bring official expectations – at 1.5 per cent – in line with Goldman’s early forecast of a drop to that level for the rest of 2010 and early 2011.

• Europe. Fans of de-coupling between economies were delivered a set-back after Olli Rehn, EU commissioner for economics and monetary, said on Monday after the close that an economic correction in Asia or the US would have a “serious negative impact on economic growth in Europe”. On Tuesday, CRH, Ireland’s building materials giant, forecast lower earnings on a slow-down in the US.

Though Germany’s gross domestic product was not revised downward, European industrial new orders in June were reported to have been slightly slower than forecast year-over-year. Orders growth also slowed from their gains in the previous month. That adds to below-forecast manufacturing activity so far in August.

France’s CAC 40 index was down 1.8 per cent as doubts about France’s ability to stick to its budget plan grew. The Eurofirst 300 index was down 1.6 per cent to its lowest mark in a month, and Germany’s blue-chip Dax index was down 1.3 per cent.

The UK’s FTSE 100 index was off by 1.5 per cent, led lower by energy firms and banks. Rio Tinto has retreated 4.3 per cent, and Xstrata 2.9 per cent, after miners gained following news of Potash seeking new bidders to rival BHP Billiton’s $39bn approach.

• Bonds. The yield on 10-year German Bunds were down 10 basis points, to 2.18 per cent after touching a new all-time low of 2.17 per cent. Japanese 10-year yields were at seven-year lows, down 1 bp to 0.92 per cent.

The yield on Benchmark US Treasuries was 10 bp lower to 2.50 per cent, after a dip to its lowest in 18 months at 2.49 per cent. An auction of $38bn of two-year bonds saw yields below 0.50 per cent, but the bid to cover ratio fell from recent auctions. The spread between 30 and 2 year debt is at its narrowest since October 2009 – an increasingly flat curve suggesting rising expectations of a slowing economy.

Though peripheral spreads were rising, it was also notable that Greece was said to be planning to resume monthly short-term bill sales in September. That suggested some confidence in the bond market for a country that was recently believed to be nearing default.

• Commodities. Benchmark US crude oil was down 2.3 per cent to $71.39 a barrel, an 11 week low. Oil has fallen sharply since its August high, as worries about recession and bearish supply reports mount.

Gold appetite was rising, as bullion reversed its losses to gain 0.4 per cent to $1,231 an ounce. Gold has of late been a reliable indicator of risk aversion, rising as investors seek safety from fluctuating asset prices.

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(Jamie Chisholm is on holiday)