Global angst lingers with stock futures lower while bonds climb

[TOKYO] Concern over the global economy and the outlook for US interest rates continued to dog financial markets, with stock futures foreshadowing further declines amid gains for bonds and gold.

Asian index futures signaled losses amid a 1.6 per cent slump in the Standard & Poor's 500 Index on Friday, as investors digested the Federal Reserve's decision to stand pat on interest rates following a month of global market turmoil. The euro held declines with Greece's anti-austerity Syriza set to remain in power after elections. Copper extended Friday's slump as Australian government bonds rose, while gold traded near a two- week high.

With traders selling off risk assets at the end of last week in favor of haven investments, and bets on a rate hike being pushed out to next year, Fed officials sought to re- balance market expectations at the weekend. Three US policy makers, including St Louis Fed chief James Bullard, argued that higher American borrowing costs are still warranted this year, with two meetings remaining in 2015. Trading this week could get off to a muted start in Asia with Japanese markets closed through Wednesday for holidays.

"Investors seemingly decided that the Fed's baulk was a sign that things are worse in the world than they actually appear," Raiko Shareef, a markets strategist in Wellington at Bank of New Zealand Ltd, said in an e-mail to clients. "The Fed's decision to hold last week means we're in for, at the very least, another six weeks of 'will they, won't they.' Risk markets are unlikely to like the message that the Fed remains very ready to hike." S&P 500 futures were little changed by 8:49 a.m. in Tokyo, while contracts on stock gauges in Australia, Hong Kong, South Korea and China slipped at least 0.6 per cent at the end of last week. The Bloomberg Dollar Spot Index maintained its rebound amid the Fed commentary, with the euro steady at US$1.1288 per dollar following Friday's 1.2 per cent slump. Yields on Australian and New Zealand 10-year debt dropped by at least one basis point, and gold futures were little changed after their first weekly gain in in a month.

While fed funds futures had been pricing in a less than 30 per cent chance the Fed would boost rates last week, economists were relatively split. Slow inflation and the gyrations in markets since China unexpectedly devalued the yuan Aug 11 were cited by US policy makers as reasons for delaying rate liftoff. Despite the comments in favor of a 2015 hike from Bullard, the Richmond Fed's Jeffrey Lacker and San Francisco Fed chief John Williams, odds of an increase in October or December remain below 50 per cent.

Uncertainty over the global outlook and the Fed's next move has stoked equity volatility, with the Chicago Board Options Exchange SPX Volatility Index, a measure of expected swings in US stocks, climbing 5.4 per cent on Friday.

Futures on Australia's S&P/ASX 200 Index lost 1.5 per cent in most recent trading, while those on the Kospi index in Seoul retreated 0.9 per cent. Contracts on Hong Kong's Hang Seng Index declined 1.4 per cent as futures on the Hang Seng China Enterprises Index, a gauge of mainland stocks listed in the city, sank 1.7 per cent. Futures on the FTSE China A50 Index and the CSI 300 Index were down at least 0.6 per cent.

The S&P/NZX 50 Index, the first major stock gauge to start trading each day in the Asian region, dropped 0.1 per cent after rising 1.1 per cent last week.

Major US indexes slipped more than 1 per cent Friday, with crude oil back below US$45 a barrel also driving losses among energy producers.

West Texas Intermediate crude added 0.3 per cent early Monday, to US$44.83 a barrel, after sinking 4.7 per cent on Friday amid ongoing concern over the global glut. Brent crude added 0.2 per cent to US$47.56 following a 3.3 per cent drop at the end of last week.

Elsewhere in commodity markets, gold futures were little changed at US$1,136.80 an ounce following a weekly advance of 3.1 per cent, the first since the second-last week of August. Copper futures on the Comex dropped 0.5 per cent to US$2.3730 a pound, extending Friday's 2.7 per cent retreat.

Among currencies, New Zealand's dollar weakened 0.2 per cent to 63.89 US cents after a gauge of consumer confidence slid to a three-year low for the third quarter.

Bloomberg's dollar gauge, which tracks the greenback against 10 major peers, was steady at 1,201.50 after snapping a two-day drop on Friday to climb 0.7 per cent.

New Zealand reports on credit-card spending Monday, while Hong Kong and Macau update consumer prices.

Yields on 10-year Australian notes fell two basis points, or 0.02 percentage point, to 2.75 per cent in a second day of declines. Rates on similar maturity New Zealand debt slipped one basis point to 3.33 per cent.

Ten-year Treasury yields dropped by six basis points last week to 2.14 per cent. US bonds won't resume trading Monday until London opens because of the holiday in Japan.

"We expect to remain bearish," Stewart Richardson, chief investment officer at RMG Wealth Management LLP in London, said by e-mail. "The Fed seems to be coming in for more criticism from all sides, and with markets falling after a dovish meeting, we believe that their credibility is now being openly questioned. We continue to believe that long-term investors should be holding a lot of cash at this point in the cycle."

BLOOMBERG