Asian equities weather Fed rate hike, after Wall Street sags

Tokyo — Asian shares held firm on Thursday, outperforming sagging Wall Street stocks, and US bond yields fell after the Federal Reserve raised interest rates as expected, sticking to its script of gradual policy tightening.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3%, with South Korea’s Kospi hitting three-month highs.

Japan’s Nikkei briefly touched an eight-month high as carmakers rose after the US indicated it would not impose further tariffs on Japanese automotive products for now, though it was down 0.1% at midday in choppy trade.

On the whole, Asia fared batter than Wall Street, where the Dow Jones industrial average fell 0.4% and the S&P 500 index lost 0.33%. The Nasdaq composite index dropped 0.21%.

The 10-year US treasuries yield fell more than five basis points to 3.048% as market participants had been braced for a more hawkish stance.

The fall in Treasury yields was good news for Asia and other emerging markets, which had been pressured by concern that higher US yields would encourage investors to move funds out of emerging markets to the US, on top of worries over the China-US trade feud.

The Fed bumped up its policy target by a quarter of a percentage point to between 2% and 2.25%, and indicated it foresees another rate rise in December, three more next year, and one in 2020.

That was little changed from its June projections.

Beyond neutral?

The Fed’s projected hikes will put the benchmark overnight lending rate at 3.4% by 2020, roughly half a percentage point above the Fed’s estimated “neutral” rate of interest.

“The Fed seems to have grown more convinced of the need to keep raising rates beyond neutral levels. I cannot see reasons to slow down raising rates as long as the jobless rate keeps falling,” said Tomoaki Shishido, fixed income strategist at Nomura Securities.

The Fed also dropped a reference in its statement to the word “accommodative”, although chairman Jerome Powell later said policy was still accommodative. He also said the Fed didn’t have any precise understanding of when policy would be neutral.

Some investors see a limited need for the Fed to keep raising rates as inflation has shown no sign of picking up so far, despite continued economic growth and a tight labour market.

The US unemployment rate stood near its lowest level since 2001.

“Three hikes next year is absurd,” said Bob Baur, chief global economist at Principal Global Investors in Des Moines, Iowa.

“With an additional rate hike likely in 2018 and one in March next year, we will reach what many Fed governors feel is a neutral rate level. With the low odds of a spike in inflation, it makes sense that the Fed would pause after the March rate hike and allow the markets to adjust to its new policy,” he said.

Adding more uncertainty to the economic outlook were trade disputes between the Trump administration and several trading partners.

US tariffs and retaliatory levies by others could slow the global economic growth, but broad-based tariffs could also stoke inflation by raising the prices of imported goods.

A boost to the US economy from Trump’s tax cuts looks set to wane next year, raising more doubts on the view that the US economy could retain strength beyond next year.

In the currency market, the dollar was mixed after the Fed’s decision.

The dollar index against a basket of six major currencies stood at 94.302, having gained 0.13% on Wednesday. It hovered above Friday’s two-and-a-half-month low of 93.808.

The euro traded at $1.1749, off a three-month high of $1.18155 touched on Monday.

The yen hit a 10-week low of ¥113.145 to the dollar in a choppy trade after the Fed’s policy announcement but it bounced back to ¥112.79.

Emerging market currencies were firmer, with MSCI’s emerging market currency index rising 0.2% on Wednesday and another 0.2% in Asia on Thursday.

These gains have sent the index up by 0.25%, raising hope it could post its first monthly rise in six months.

Oil prices gained on an impending fall in Iranian exports due to US sanctions, which are set to be implemented in November.

Global benchmark Brent rose 1.1% to $82.22 a barrel, near the four-year high of $82.55 set on Tuesday. West Texas Intermediate (WTI) crude futures gained 1.3% to $72.47 a barrel.

Reuters