The end of a three-day winning streak for Wall Street and a slide in oil prices saw Asian markets retreat on Friday, but not by enough to undo solid gains for the week.
Japanese shares were the worst performers today as the yen strengthened for a second session. The Nikkei 225 was down 2.2 per cent, while the Topix was off 2.1 per cent.
For the week, the Nikkei was up 5.9 per cent, on track for its best weekly performance since the week ended October 31, 2014 when the Bank of Japan boosted the size of its asset-purchase programme.
Hong Kong’s Hang Seng was down 0.4 per cent in morning trade, but eyeing a 5.2 per cent gain for the week. Australia’s S&P/ASX 200 was down 0.6 per cent today, but ahead by 4.1 per cent over the past five sessions.
On the mainland, China’s Shanghai Composite was flat while the tehc-focused Shenzhen Composite was up 0.3 per cent. The benchmarks were up 3.6 per cent and 5.6 per cent, respectively, this week.
Wall Street’s three-day winning streak – its longest since December 23 – came to an end on Thursday courtesy of a sell-off in retail stocks and weakness in oil prices. The S&P 500 ended 0.5 per cent lower, while the Nasdaq Composite was down 1 per cent.
Volatility in oil prices picked up on Thursday, with prices at one point up by more than 3.5 per cent before the release of data showing total US crude inventories rose by less-than-expected in the previous week. That saw West Texas Intermediate, the US benchmark, end higher, but Brent crude, its international counterpart, ended lower.
On Friday morning, Brent and WTI were both down 0.8 per cent at at $34.01 a barrel and $30.54, respectively.
Earlier this week, oil prices shot higher as Russia and Saudi Arabia proposed freezing production at January’s level. Iran and Iraq have cautiously welcomed the proposal from other major producers and left the door open to co-operating with them, but stopped short of making a commitment to cut their own output.
The energy sectors were the worst performers on the Japanese and Australian bourses today, down 6 per cent and 3.4 per cent, respectively.
Lower energy prices prices should be a positive for growth, but they are putting a dampener on inflation, and complicating the job of central banks to reach their inflation targets. Investors will turn their attention to US inflation data, due tonight.
“Lower oil prices are helping recovery / aiding growth in most parts of the world, including the US and Asia. And behind all the loud headlines about falling oil prices, core inflation continues to quietly march northward. When oil prices stabilize, we will finally discover whether they were holding core prices down. If the answer turns out to be yes, core inflation would accelerate all the more quickly thereafter,” said analysts at DBS.
Weak January trade data for Asian countries including China, Japan, Taiwan and Korea points to a significant deterioration in global trade and have only strengthened the case for more monetary easing, according to HSBC.
“In light of growing downside risks to what is already a tempered growth outlook, we expect further rate cuts from many of the region’s central banks, including in China, Indonesia, India, Korea, Australia, New Zealand, and Japan, where the Bank of Japan introduced a negative interest rate policy in January,” they added.
However, given the yen’s recent strengthening despite the BoJ’s decision late last month to introduce negative interest rates, investors are wary of the growing inability for central bank action to curb currency appreciation, boost inflation and lift equity markets.
According to analysis by Bank of America Merrill Lynch, negative interest rates have thus far failed to lift inflation expectations in the eurozone, Switzerland and Japan, while there has been only moderate success in Sweden.
“In our view, the ineffectiveness of NIRP could be due to the market interpreting it as policy exhaustion as markets require ever-increasing accommodation to achieve the same outcome,” they said.
The yen was 0.3 per cent stronger this morning at Y112.90 and weighing on Japanese stocks. The currency, trading around a one-week high, was on track for its first back-to-back gain since last Thursday.
Gold, which is typically sensitive to interest rate moves, was down 0.3 per cent at $1,226.69 an ounce, but has gained in recent weeks as investors anticipate central banks will need to further open the stimulus spigot.
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