Asian stocks wobble as traders weigh Fed rate pause option Asian stock markets edged lower on Tuesday as economic data showed U.S. services sector unexpectedly softened, reinforcing expectations that the Federal Reserve may skip an interest rate hike when it meets next week. MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.1% at 514.37. Tokyo’s Nikkei eased 0.22%, while Australia’s S&P/ASX 200 index lost 0.73% ahead of the Reserve Bank of Australia’s (RBA) policy decision later in the day. China shares declined 0.15%, while Hong Kong’s Hang Seng Index was 0.07% lower. Data overnight showed that the U.S. services sector barely grew in May as new orders slowed, pushing a measure of prices paid by businesses for inputs to a three-year low, which could aid the Federal Reserve’s fight against inflation. The services industry accounts for more than two-thirds of the U.S. economy. Data on Friday showed U.S. nonfarm payrolls rose by 339,000 jobs in May, but a surge in the unemployment rate to a seven-month high of 3.7% suggested an easing in labour market conditions. Markets are now pricing in a 77% chance of the Fed standing still, a sharp jump from a 36% chance a week earlier, according to CME FedWatch tool. “The tactical risk for equity investors in the very near term is that the Fed indeed skips a meeting and raises rates in July and not June,” said Gary Dugan, CIO of Dalma Capital. “The vibrancy of growth, the debt ceiling as an issue out of the way now, and a slow-moving Fed might just trigger a further rally in equities.” In oil markets, prices eased to give up most the gains from the previous session after the world’s top exporter, Saudi Arabia, said that it would further cut output. U.S. crude fell 0.25% to $71.97 per barrel and Brent was at $76.55, down 0.21% on the day. Saxo strategists said recession concerns, firmer signs of Fed rate cuts or China stimulus measures may be needed to turn sentiment on the energy markets. “Still, risks of a tighter market in second half remain with OPEC focused on ensuring market stability.” In the currency market, the dollar index, which measures greenback against six major peers, eased 0.01%. The yen weakened 0.04% to 139.62 per dollar, while Sterling was last fetching $1.2436, off 0.01% on the day. The Australian dollar eased 0.02% to $0.661 as traders wait for the policy decision from the country’s central bank. “We expect the RBA to leave the cash rate on hold,” analysts at Commonwealth Bank of Australia said in a note. But the decision to raise minimum wage by 5.75% from July 1 increases the risk the RBA hikes the cash rate by 25 basis points, the CBA analysts wrote. In cryptocurrencies, bitcoin was last at $25,657.98, having slid over 5% overnight after the U.S. securities regulator sued crypto exchange Binance, in another blow to the industry.
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However, he believes that the impact on the Indian market is going to be temporary since there could be some short-term impact on flows into Indian equity markets. But since the Indian economy is on a strong wicket and will continue to remain resilient.
“Improved fiscal situation, controlled current deficit, stable interest scenario combined with good corporate earnings should lead to limited impact on the Indian bond market and equity market too,” he added.
The midcap and smallcap indices took a bigger knock with the BSE MidCap fell 2.51%, while BSE SmallCap index dived 4.18%. According to Amnish Aggarwal, head, research, Prabhudas Lilladher, the valuations were already high and some correction was expected. “If the situation sustains as it is then further correction can’t be ruled out,” Aggarwal said.
Telecommunication and industrials indices were the top laggards with BSE Telecommunication declining 3.82%, followed by BSE Industrials falling 3.26%. JSW Steel (-2.99%), Tata Steel (-2.52%) and Tata Consultancy Services (-2.44%) were the top losers of Sensex.
Surprisingly, both foreign portfolio investors and domestic institutional investors were net buyers today. While, FPIs net bought shares worth Rs 252.25 crore, DIIs have purchased shares worth Rs 1,111.84 crore, as per provisional data from exchanges.
Calling this a “normal phenomena” Pankaj Pandey, head, research, ICICI Direct said, “I will not really give too much weight to a single day buying figure. Amid concerns of elevated interest rate and geopolitical tensions, in a typical market cycle, 8-10% correction is possible at any point in time.”
The brunt of geopolitical conflict, elevated interest rates and rising crude oil prices was also felt by other Asian- Pacific markets. Jakarta Composite Index lost 1.57% followed by Shanghai Composite Index and PSEi, which fell 1.47% and 0.89%, respectively. Nikkei and KOSPI declined 0.83% and 0.76%.
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