Asian stocks extend retreat with oil as Chinese markets resume

[HONG KONG] The slump in stocks and commodities continued into Asian trading, with futures pointing to a selloff in Chinese equities following a holiday break.

The Asia-Pacific benchmark headed for its lowest close since November 2012 as futures traders bet Shanghai stocks will fall on their first day of trading since Wednesday. Copper and nickel slipped with crude oil, while Malaysia's ringgit led emerging-market currencies lower. The yen held gains after posting its biggest advance of 2015 last week amid anxiety in markets.

"Trading in Asia today will be driven by two major factors: the delayed response to Friday's nonfarm payrolls number and the reopening of the Chinese stock markets," Angus Nicholson, a markets analyst in Melbourne at IG Ltd, said in an e-mail to clients. "Both of these factors are likely to spur further selling in Asian markets today, with the outcome of the Chinese market reopening being the greater cause for concern." China worked to soothe concern over its economy at the Group of 20 meeting in Turkey at the weekend, with officials predicting stabilisation in the currency and stock markets. Friday's payrolls report showed that while wages and the number of hours worked increased last month, the US added fewer workers than expected, leaving bets on a rate hike in September around 30 per cent. International Monetary Fund chief Christine Lagarde emphasised that the Federal Reserve must be certain the US can handle higher rates given the impact it will have on the global economy.

Stocks The MSCI Asia Pacific Index slipped 0.6 per cent by 10:06 am in Tokyo, as Japan's Topix index lost 0.6 per cent. FTSE China A50 Index futures slid 0.8 percent in Singapore, while contracts on the Standard & Poor's 500 Index gained 0.2 per cent after the index fell 1.5 per cent Friday, ahead of a three-day weekend in the US. Markets in Canada and Brazil are also shut Monday.

Energy producers and mining stocks drove Australia's S&P/ASX 200 Index down 1 percent, while the Kospi index in Seoul declined 0.3 per cent, extending last week's 2.7 per cent drop.

Gauges of volatility in Japanese and Korean stock markets rose for a second day, following a 8.6 per cent bounce back in the Chicago Board Options Exchange Volatility Index Friday. The gauge of expected US stock swings, known as the VIX, reached a an almost four-year high on Aug 24.

The MSCI All-Country World Index also retreated, losing 0.1 per cent in early Monday trading after sinking 1.7 per cent on Friday. More than US$8 trillion has been erased from the value of global equities since Aug 11, when China roiled markets by unexpectedly devaluing its currency. Concern over the slowdown there and the potential impact of higher US borrowing costs has fueled swings in equity to currency and commodity markets the past month.

Commodities Copper and nickel fell at least 0.2 pervcent after also retreating on Friday, while oil decreased a second day.

West Texas Intermediate crude sank 1.5 pervcent to US$45.37 a barrel with all electronic transactions to be booked with Tuesdays for settlement purposes because of the Labor Day holiday in the US Brent also slipped a second day, losing 1.3 per cent to US$48.99 per barrel after Venezuela proposed an OPEC summit to stabilise prices amid a global oil glut.

Gold - which despite its reputation as a haven has been wrong-footed by the recent market gyrations - was little changed at US$1,122.03 an ounce following a three-day drop. While the payrolls gain trailed economists' estimates, the US jobless rate dropped to a seven-year low, the Friday data showed, driving home that while it may not happen this month, US rates are on the rise.

Currencies In the foreign exchange markets, developing-nation currencies caught up with Friday's action, while Australia's dollar pared some of last session's slide to a six-year low.

The ringgit, which is already at a 17-year low, weakened another 1 per cent as Korea's won slipped 0.5 per cent and New Zealand's dollar lingered near its lowest level since 2009. The yen maintained two days of gains, trading at 119.08 per dollar after gaining 2.2 per cent last week.

China's yuan climbed 0.2 per cent in offshore trading to 6.4532 per dollar. G-20 leaders pledged to avoid a currency war in the wake of the yuan's devaluation, the first time they have used such language since 2013. Chinese Finance Minister Lou Jiwei told the meeting he expects Asia's largest economy to grow at a rate of about 7 per cent over the next four or five years, according to an account on the PBOC's website.

Intervention in the market helped ease Chinese stocks into last week's two-day break, with the Shanghai Composite Index set to reopen at the same level it traded at Aug 27. People's Bank of China Governor Zhou Xiaochuan said in a statement at the weekend that the rout in Chinese equities is close to ending, and that the state's actions prevented systemic risk by stopping a free-fall.

China will deliver an update on its foreign-currency reserves Monday, providing investors with some idea of how much has been spent by regulators to shore up local markets and the yuan. Singapore and Indonesia also report on reserves, while Taiwan issues trade data.

Bonds in Asia shrugged off Friday's gains in US Treasuries, with yields on 10-year Japanese notes rising one basis point, or 0.01 percentage point, to 0.37 per cent. Rates on similar maturity Australian debt climbed two basis points to 2.65 per cent. Yields on Treasury notes due in a decade ended Friday down four basis points to 2.13 per cent.

Odds the Fed will raise rates at their meeting next week are at 30 per cent, up from 26 per cent before the jobs data, though below the 48 per cent priced in before China's surprise yuan depreciation on Aug 11. Payrolls rose by 173,000 workers, training the 217,000-person increase projected by economists. The jobless rate sank to 5.1 per cent for August.

"The overall tone of the data was certainly solid enough to leave the Fed in play later this month," Philip Borkin, a senior economist in Auckland at ANZ Bank New Zealand Ltd, said in a note to clients. "But to be fair, the Fed's decision of whether to hike or not is not really about the labour market, it hasn't been for a few months now. The main questions - and what is polarising markets and creating plenty of debate - are the outlook for inflation, the impact of tighter financial conditions and the state of the global economy."

BLOOMBERG