Mild gains for Wall Street encourage Asia

Weaker yen lifts shares of Japanese exporters

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Thursday 03.40 GMT. Asian stock markets are edging higher, encouraged by small gains on Wall Street, with Japanese technology companies gaining ground as the yen continues to retreat from a 15-year high against the dollar hit earlier this week.

Sentiment across the region has improved after the Dow Jones Industrial Average managed a gain, adding 0.2 per cent on Wednesday to break a four-session losing streak. Attention now is primarily on Ben Bernanke, US Fed chair, speaking at Jackson Hole on Friday, for hints on the Fed’s next policy move. To some extent he may have pre-empted his speech by surreptitiously talking to reporters, but it will be closely watched nonetheless.

The MSCI Asia Pacific Index is 0.2 per cent higher. Japan’s Nikkei 225 is up 0.3 per cent, Australia’s S&P/ASX 200 is up 0.4 per cent, South Korea’s Kospi is 0.2 per cent higher and New Zealand’s NZX-50 has gained 0.8 per cent.

The weaker yen is boosting technology shares in Japan, with Canon up 1.8 per cent, Sony 1.3 per cent higher, and Nissan Motor up 0.8 per cent. Technology plays are doing well in Seoul, with LG Display up 0.9 per cent and Hynix Semiconductor 1.1 per cent higher.

In Australia, a cautious outlook from mining giant BHP Billiton, despite a strong quarterly profit report, is weighing down resources stocks. BHP Billion is down 1.0 per cent and Rio Tinto is off 0.9 per cent.

In New Zealand, shares of Air New Zealand have soared 5.8 per cent on an upbeat outlook while chemicals maker Nuplex is up 8.1 per cent on strong net profits.

In the currencies market, the yen is softer against the dollar and euro amid speculation that Japanese authorities might take steps to curb the yen’s strength, with some talk that central bankers could announce measures to boost the global economy.

The Japanese currency is at Y84.74 per US dollar, down from Y84.58 late in New York, pulling farther away from a 15-year high of Y83.60 hit on Tuesday. Against the euro, the yen is at Y107.49, from Y107.05.

The yen intervention debate is a tug-of-war between the more dovish government finance ministry and the cautious Bank of Japan.

“The BoJ might consider additional policy easing measures before giving in to pressure from the government to intervene in the markets,” says Raghav Subbarao, currency strategist at Barclays Capital.

But analysts at Brown Brothers Harriman say no other countries have stepped up to offer any assistance in curbing their own currencies’ declines, so any BoJ intervention would likely be unilateral and thus ineffective, they conclude.

Overnight, global shares finished a volatile day in negative territory in spite of a last-minute rebound on Wall Street. US data on goods orders and home sales added more evidence of a slowing economy and pushed US stocks down for most of the session.

Traders had started the global session by halting the yen’s rise to 1995 levels after Japanese officials stepped up their so-called verbal intervention to stem the currency’s ascent. Yoshihiko Noda, finance minister, said he was considering “appropriate action” on what he described as “one-sided” moves in the yen.

But after the US data reports, the yen briefly gained again before falling back, down 1 per cent. After choppy trading in the US markets, with the Dow Jones Industrial Average at one point struggling to hold the 10,000 level, a late day rebound left Wall Street closing in positive territory. The S&P 500 index closed up 0.3 per cent, paring the losses on the FTSE All-World stock index, which was down 0.5 per cent.

Data showed that new home sales fell 12.4 per cent in July, bringing sales to their lowest for a month in the history of the data series. Economists had expected sales to be flat after a 12 per cent rise in June. On Tuesday, existing home sales fell by the most in 15 years.

Durable goods orders overall were up just 0.3 per cent, below a forecast of 1.6 per cent – and nearly 4 per cent lower without transportation purchases included. Traders’ reaction was much stronger to the goods report, having already had their housing expectations lowered.

“Terrible, just terrible,” said Jonathan Basile, economist at Credit Suisse, said of the goods report. “Core capex orders were the eye-opener,” he said, pointing to an 8 per cent decline in company spending on expansion, the lowest level since January 2009.

European stocks took a hit after Ireland’s credit rating was downgraded and losses accelerated as markets anticipated more poor US economic news.

The “downgrade of Ireland...won’t help restore already shaky investor risk appetite with respect to the European financial system,” said Michael Hewson, market analyst at CMC Markets.

Yields on German Bunds continued to plunge as well, in spite of an expectations-beating Ifo business climate survey. The yield on ten-year Bunds was again at record lows, while the yield premium for Irish debt is at an all-time high. Portugal, however, successfully sold bonds – suggesting fear had not yet spiked to crisis levels.

Even though the Federal Reserve lowered its growth forecast in early August, sparking a sell-off, economists are still adjusting their expectations further downwards. Markets are preparing for a potentially disappointing revision of second-quarter GDP figures on Friday, as well as the Institute of Supply Management index and the non-farm payroll report at the beginning of September.

Forecasters expect US GDP to have grown by just 1.5 per cent in the second quarter, lower than the 2.4 per cent growth originally measured, thanks to a rise in the trade deficit shipping more income overseas and disappointing manufacturing data.

Regional factory indices in Philadelphia and Richmond have shown declines in activity; Chicago is set to report on August 31. A decline in the ISM to below 50 would indicate that US manufacturing was no longer expanding – a step on the path to the “double dip” recession so feared by markets.

• Europe. The rating agency Standard & Poor’s had downgraded Ireland to AA- and warned that its outlook was still negative, even at that level. “[Rising] budgetary cost of supporting the Irish financial sector will further weaken the government’s fiscal flexibility,” the agency said.

Irish spreads against German bunds pushed further beyond their May highs, though yields on German bonds themselves were slightly higher following a steep decline on Tuesday. Shares of the Bank of Ireland were down 5 per cent, and Allied Irish Bank shares were lower by 5.5 per cent.

The UK’s FTSE 100 index was down 0.9 per cent, in spite of BHP Billiton’s strong quarterly profit report. The FTSE Eurofirst 300 index was down by 0.8 per cent – less than half its peak loss of the day – with the blue-chip German Dax index down 0.6 per cent, and France’s CAC 40 index down 0.9 per cent.

• Debt. Yields on core bonds were easing and in some cases rebounded from their decline. The 10-year US Treasury yield was up 5 basis points to 2.54 per cent, after hitting 2.48 per cent, its lowest in over a year. German Bund yields were down 4bp, having earlier fallen 7 bp to new record low yield of 2.14 per cent.

Yields on 5-year US Treasuries rose after a $36bn auction, up 6 basis points to yield 1.38 per cent. On Tuesday an auction of 2-year US Treasuries was successful in a market where bonds were in ascent, but demand for the issue was not as strong as recent months. The US Treasury has 10-year bonds to sell later this week.

The spread between Irish bonds and Bunds hit a record high. Spreads rose as much as 14bp on Tuesday, and were up 22bp on Wednesday. Credit default swaps on Irish bonds are also at record levels, though flat for the Wednesday session. Spreads on other European peripheral debts were also on the rise with yields on Greek bonds up 38bp.

Portugal, however, sold €1.3bn of bonds, more than it had originally set out to sell, but at demand levels behind Ireland’s auction last week.

• Commodities. Crude oil prices started to rise from their 11-week low, defying gloom in Europe and the US to climb 1.6 per cent to $72.80.

Gold was benefiting from hedge funds buying it as a long-term bet against the inflationary affects of intervention in Europe, the US and Japan. On Wednesday it was up 0.8 per cent and rose to $1,240 to trade near its early August high, just $20 off its nominal all-time high.

Follow the Global Market Overview on Twitter: @telisdemos

(Jamie Chisholm is on holiday)

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