Asia: Stocks, bonds drop with oil as Fed weighs June rate hike

[WELLINGTON] Asia's stocks, bonds and currencies fell along with commodities after minutes of the Federal Reserve's last policy meeting put the prospect of a June interest-rate hike firmly on the table. A gauge of the dollar's strength held gains following its biggest jump in six months.

The MSCI Asia Pacific Index sank to a six-week low as Singapore's 10-year bonds dropped by the most in four weeks.

Currencies in Australia, China and South Korea sank to their weakest levels in more than two months after the Fed record showed most of its rate-setting officials were in favor of boosting borrowing costs next month should the US economy continue to improve.

Crude oil fell for a second day as zinc led declines in industrial metals. Gold was headed for its lowest close this month.

The Fed minutes provided a jolt to markets that had until Monday all but ruled out the prospect of US interest rates being raised in June. Fed Funds futures show the odds of such a move surged to 32 per cent on Wednesday, after tripling to 12 per cent in the prior session as data on inflation, housing starts and industrial production exceeded economists' forecasts. The shift in expectations comes ahead of a meeting of the Group of Seven finance ministers, where Japan is likely to push further fiscal spending as the answer to reigniting lukewarm global economic growth.

"The minutes showed that the policy makers' desires to raise rates in June exceeded the market's expectation for action," said Mitsushige Akino, an executive officer at Ichiyoshi Asset Management Co in Tokyo. "The US economy is doing so well that the FOMC can hike rates. But the global economy is on the decline and investors are not sure whether the Fed can really increase interest rates or not," he said, referring to the Federal Open Market Committee.

An index of leading economic indicators in the US is due to be released on Thursday, while the UK will report on retail sales.

Australian figures showed the nation's unemployment rate held at a 2 1/2 year low, while the Philippines announced first- quarter economic growth that was the fastest since 2013. Wal-Mart Stores Inc, Merck KGaA and Royal Mail Plc are among companies reporting earnings.

STOCKS

The MSCI Asia Pacific Index declined 0.7 per cent as of 11.41am Tokyo time, led by slides in raw-material producers and energy stocks.

"Shares have been oversold so we're likely to see companies with attractive valuations being bought back," Ichiyoshi Asset's Akino said.

"I'd expect stocks to show a high correlation with currency markets going forward." Futures on the S&P 500 declined 0.2 per cent, while contracts on the UK's FTSE 100 Index slid 0.7 per cent.

CURRENCIES

The Bloomberg Dollar Spot Index was little changed, after jumping 0.8 per cent on Wednesday to its highest level this quarter. The Japanese yen gained 0.2 per cent, following a 1 per cent slide in the last session.

"The minutes suggest that the odds of a June hike or even a signal in June for a July hike are more likely than the market was prepared for," said Bipan Rai, executive director of foreign-exchange strategy at Canadian Imperial Bank of Commerce in Toronto.

"The greenback should be bid here." Australia's dollar weakened 0.2 per cent, while currencies in Indonesia, Malaysia, the Philippines and South Korea dropped by at least 0.5 per cent. South Africa's rand was little changed, after tumbling 2 per cent in the last session. Malaysia, Indonesia and South Africa are set to review monetary policy on Thursday.

BONDS

The yield on Singapore's 10-year bonds jumped seven basis points to 2.06 per cent, while that for Australia's debt climbed six basis points to 2.34 per cent. Yields on similar-maturity US Treasuries added another basis point to 1.86 per cent after ending last session up eight basis points.

COMMODITIES

West Texas Intermediate crude dropped 1.4 per cent to US$47.57 a barrel, extending Wednesday's retreat from a seven-month high.

The dollar's increase coupled with renewed concern over the global oil glut unsettled crude markets, with US oil inventories unexpectedly rising by 1.3 million barrels last week, according to government data issued on Wednesday. Rain in Canada may have also slowed fires that have shifted back toward the province of Alberta's oil-sands operations.

Zinc fell 0.7 per cent to a one-week low in London, while copper was headed for its worst close since February. Gold declined 0.1 per cent, after a 1.6 per cent slide on Wednesday.

BLOOMBERG