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Asian shares fell on Tuesday with the strengthening dollar sapping demand for emerging market assets. Surging oil prices fueled concerns over a jump in inflation as well as quicker US interest rate hikes.

Japan’s Nikkei was primarily flat. Australian shares dropped 0.9 percent, while Chinese shares began the session in the red with the blue-chip CSI300 off 0.7 percent.

Liquidity was thinner due to the holidays in Hong Kong and South Korea.

MSCI’s broadest index of Asia-Pacific shares excluding Japan was a trifle higher at 568.4 points. However, it was well below an all-time peak of 617.12, which was reached in January.

“We are seeing US dollar strength and that is causing money to flow out from emerging markets to the US. There is some sort of risk aversion going on,” according to Yoshinori Shigemi, who is that global market strategist at JPMorgan Asset Management. “People are cautious about taking exposure in emerging markets.”

Such concerns neutered the boost to sentiment from overnight gains in Wall Street around the seeming reconciliation between China and the United States over import tariffs threats.

Inflation and Interest Rate Concerns

According to analysts, investors in the region raised concerns about the growth outlook as the US Federal Reserve sticking to its policy tightening trajectory.

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“Stocks have rallied several times on the belief that trade tensions were easing, only to fall back down as investors took the opposite view,” stated James McGlew. McGlew is the executive director of stockbroking at Argonaut.

“While the global economy remains robust and first-quarter earnings have been strong, stock markets have mostly traded sideways this year because many investors have started to fear that the pace of the expansion has already peaked,” he added.

After a staggering increase of 33.5 percent in 2017, the MSCI broadest index excluding Japan is flat so far this year.

JPMorgan’s Shigemi stated that investors will now shift focus to the next Fed meeting scheduled on June 13, where it is predominantly anticipated to increase rates for the second time this year.

Even if some investors expect the US central bank to be extra aggressive this year, a total of 3 interest rates hikes have already been fully priced in by the market for 2018.

The fear of higher inflation causing faster Federal Reserve hikes brought a bond market rout earlier this year. This sent yields steeply higher, sparking a share market sell-off.

The dollar stayed near five-month highs against a basket of other major currencies, supported by the US-China trade optimism.

The dollar index, which gauges the greenback’s strength against a basket of 6 other major currencies, was last down 0.1 percent at 93.56 from Monday’s high of 94.058.

The euro was firm at $1.1782, which was within arm’s reach of a more-than-six-month trough of $1.1715. The trough was reached on Monday, as the political uncertainty in Italy continued.

Italy’s far-right League and the 5-Star Movement agreed on a candidate that will lead their planned coalition government. The candidate is also tasked to implement spending plans, which were considered by some investors to be threatening the sustainability of the nation’s debt pile.

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