Kospi falls 1.6% as Asian stocks drop after hawkish Warsh tone

ASIAN stocks dropped and the US dollar held its gains after hawkish comments from Federal Reserve chair Kevin Warsh strengthened bets on an interest rate hike in September. Oil climbed as Middle East tensions intensified.

MSCI’s Asia Pacific equities gauge fell as much as 1 per cent before paring its decline to 0.6 per cent, with technology shares leading losses.

The Kospi Index – a barometer for artificial intelligence investments – dropped 1.6 per cent, with chipmakers Samsung Electronics and SK Hynix among the decliners. US stock-index futures also retreated.

Among the main moves across markets, the S&P 500 futures fell 0.3 per cent as at 9.45 am Tokyo time.

The Hang Seng futures fell 0.2 per cent, Nikkei 225 futures (OSE) fell 1.7 per cent, Japan’s Topix fell 0.7 per cent and Australia’s S&P/ASX 200 was little changed.

The US dollar traded in a narrow range against major peers after posting its biggest gain in about a month on Friday (Aug 28) following Warsh’s remarks.

Elsewhere, Brent crude climbed 1.4 per cent to US$89.30 a barrel after the US military on Sunday struck Iranian rocket launchers that were preparing to send mines into the Strait of Hormuz, ending weeks of relative calm. 

The moves showed a cautious start to the week after Warsh vowed in his Jackson Hole speech on Friday to bring inflation back to target, prompting traders to lift the probability of a September rate hike to 60 per cent.

Adding to the pressure, escalating Middle East tensions drove oil higher, raising the risk of another bout of price pressures.

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“Asian market will be in a defensive mode to start the week today,” said Nick Twidale, chief market analyst at AT Global Markets.

“The combination of a sharp escalation in Fed rate hike expectations after Kevin Warsh’s speech on Friday and renewed US strikes in the Strait of Hormuz will have investors on full alert.”

The attack by the US was the first military action against Iran in more than a month, as US President Donald Trump has switched to a campaign to drive Iran to the negotiating table by squeezing its economy.

In other corners of the market, gold steadied around US$4,460 an ounce after last week’s sell-off. Higher interest rates tend to diminish the appeal of the non-yielding metal.

Futures on the S&P 500 Index lost 0.2 per cent and those on the Nasdaq 100 Index retreated 0.3 per cent after the underlying gauges closed lower on Friday and as tensions rose in the Middle East.

The yen hovered around 160 per US dollar after hitting its weakest level in a month. Traders will be alert to stronger rhetoric from Japanese officials after the currency weakened on Friday after the US dollar surged, erasing more than half of its intervention-fuelled gains.

The recent intervention has “curbed yen depreciation pressures to some degree, signalling that a move well above 160 is unlikely to be tolerated,” Barclays strategists including Lemon Zhang wrote in a note to clients.

“However, fundamental factors continue to weigh on the Japanese yen, including a still-wide US-Japan yield differential, fiscal pressures and continuing Japanese investors’ purchases of overseas assets.” 

Meanwhile, traders have piled into bets that a quarter-point rate hike in September is more likely than not, and will tighten policy at least once more over the coming year, according to swaps data compiled by Bloomberg.

In his first major speech since taking the helm of the central bank, Warsh warned inflation is not meaningfully slowing and said policymakers must be confident it is, otherwise the Fed has “work to do”. 

He said financial conditions are not currently restrictive and described rates as the Fed’s “predominant tool” for achieving its mandate, while stopping short of signalling support for a hike in September.

“The market took a hawkish message away from Fed chair Warsh at his Jackson Hole speech,” Marc Chandler, chief market strategist at Bannockburn Capital Markets, wrote in a note.

“Even if the market has overreacted to Warsh’s comments, the upside (US) dollar correction has only just begun.” BLOOMBERG