Asia: Stocks drop with US dollar amid Fed countdown as bonds rally

[WELLINGTON] Oil has quickly lost its sway over markets, with Asian stocks and the US dollar retreating as the focus switches to this week's anticipated interest-rate hike in the US. Bonds rallied.

Japanese indexes fell from their highest levels this year, and equity futures in Hong Kong and China tipped further losses after the worst day for mainland stocks since June distracted from Monday's global rally. Government debt from Australia to the US snapped declines as oil dialled back gains spurred by Opec's deal with major rivals to curb production over the weekend.

The yen maintained its advance versus the US dollar as the Korean won and Thai baht led gains in Asia. Copper futures fell for a second day.

While oil's gains initially spurred a rally in Asian stocks and weighed on sovereign debt, prices pulled back late Monday amid concern over whether the Opec-led agreement will be fulfilled. Banks drove the S&P 500 Index from a record high as attention switched to the Federal Reserve's review this Wednesday.

The prospect of increased price pressures is colouring the outlook for central-bank policy, with traders seeing 100 per cent odds of a rate hike in the US this week, and a two-in-three chance of additional tightening by June, according to Bloomberg calculations based on Fed fund futures.

"The moves today suggest traders don't see a more hawkish stance materialising and that the Fed is likely to maintain a slow and steady course on tightening policy," said Chris Weston, chief market strategist in Melbourne at IG Ltd.

"The event risk increases somewhat in Asia today" with China reporting on industrial output, retail sales and updating on fixed assets, he said.

Australia also reports on business conditions and house prices Tuesday, India updates on consumer prices and jobs data is due in the Philippines.

About 80 more stocks fell as rose on the US dollar-denominated MSCI Asia Pacific Index as of 9:26am Tokyo time, with Japan's Topix index declining 0.2 per cent with the Nikkei 225 Stock Average.

Australia's S&P/ASX 200 Index fluctuated amid a pullback in financial companies, the Kospi index dropped 0.1 per cent in Seoul, and New Zealand's S&P/NZX 50 Index slipped 0.2 per cent.

Futures on Hong Kong's Hang Seng and Hang Seng China Enterprises indexes slipped by at least 0.1 per cent in most recent trading.

FTSE China A50 Index futures lost 0.3 per cent following Monday's 2.5 per cent slide in the Shanghai Composite Index, its worst one-day performance since June.

S&P 500 Index futures were little changed following a 0.1 per cent decline in the underlying benchmark last session that knocked it from a record high.

Australian 10-year bonds led gains in the Asia-Pacific, with yields falling three basis points, or 0.03 percentage point, to 2.82 per cent.

Similar maturity New Zealand debt yielded 3.31 per cent, down two basis points after rising by 14 basis points the past two sessions.

Yields on Treasury notes due in a decade fell one basis point to 2.46 per cent. They ended Monday little changed after rising by as much as six basis points to touch 2.53 per cent, their highest level since September 2014.

BLOOMBERG