Stock futures drop, Yen rallies after Fischer talks up inflation

[WELLINGTON] Renewed speculation the US will boost interest rates as soon as September sank American stock futures, while crude oil pulled back following a two-day surge.

The yen spiked higher as the Australian and New Zealand dollars retreated, signaling a drop in risk appetite as trading got under way Monday. Futures slipped on copper, a bellwether commodity for sentiment on China, while gold maintained Friday's bounce.

With central bankers converged on Jackson Hole, Wyoming, at the weekend for the Federal Reserve's annual retreat, Vice Chairman Stanley Fischer said there is "good reason" to believe inflation will accelerate. While careful to convey he wasn't signaling an impending rate increase, Mr Fischer's remarks suggested a hike at the Fed's September meeting couldn't be ruled out. Uncertainty over when the Fed will pull the trigger on rates fueled last week's global stock gyrations, ignited amid concern over China's slowdown.

"Normalisation was the key theme at Jackson Hole over the weekend," Cameron Bagrie, chief economist in Wellington at ANZ Bank New Zealand Ltd, said in a client note. "Fischer reaffirmed that the Fed remained on track for lift-off this year and that the door remains open to a September hike. China needs watching, but developments as yet don't warrant changing tack."

EARLY MOVERS

Futures on the Standard & Poor's 500 Index lost 1.3 per cent to 1,964 by 7.54 am in Tokyo, while contracts on Japan's Nikkei 225 Stock Average also traded down, sliding 0.9 per cent in Chicago. The yen gained 0.4 per cent, while the Aussie and the kiwi slipped at least 0.3 per cent. Copper futures due in December dropped 0.4 per cent on the Comex, with gold little changed at US$1,133.09 an ounce.

West Texas Intermediate crude declined 1.1 per cent to US$44.74 a barrel after adding to Thursday's 10 per cent surge with a 6.3 per cent advance on Friday, its steepest two-day jump since 2009. Data indicating US consumer purchases climbed in July as incomes grew boosted optimism over fuel demand at the end of last week. Brent oil slipped 1.1 per cent Monday to US$49.48 after gaining 10 per cent last week, the most since March 2009.

After sliding at the start of the week along with indexes from the US to China, MSCI's gauge of global equities ended up 0.5 per cent last week, rallying from an almost two-year low reached Aug 25. China's Shanghai Composite Index pared losses incurred in the first three days of the week, rising 10 per cent on Thursday and Friday amid speculation regulators were intervening to stymie declines.

MARKET VULNERABLE

The rout will resume because propping up the market will prove too costly for the Chinese authorities, according to David Cui, China equity strategist at Bank of America Corp in Singapore. The Shanghai Composite needs to fall another 35 per cent before shares become attractive, he said.

"Financial markets are vulnerable," Stewart Richardson, chief investment officer at RMG Wealth Management in London, said in an e-mail. "With economic conditions not improving, and in our view probably deteriorating next year, the volatility and stress seen in the last two weeks will happen again, and likely even be worse." Both Japan and South Korea report on factory output Monday, while Sri Lanka reviews rates and inflation data.

Thailand updates on trade and its current account, while India reports on economic growth later in the session. Markets in Malaysia and the Philippines are closed for holidays, along with the UK.

BLOOMBERG