Yellen's comments on next US rate hike weigh on Asia bourses

Kuala Lumpur

ASIAN stocks outside Japan fell after Federal Reserve chair Janet Yellen said the case for raising interest rates is getting stronger. Shares in Tokyo rallied as the yen weakened and the Bank of Japan's (BOJ) governor vowed to add stimulus if needed.

The MSCI Asia Pacific Excluding Japan Index dropped 0.9 per cent as at 4.10pm in Hong Kong, after its first back-to-back weekly decline since June. Indonesian equities led losses, while Japan's Topix index rose the most in three weeks. Ms Yellen said in Jackson Hole on Friday that the case for tightening policy had strengthened. While she stopped short of revealing the specific timing of a rate move, vice-chairman Stanley Fischer said that a rate increase in September is possible.

Odds of a Federal Reserve rate hike in September jumped to 42 per cent from 22 per cent a week ago, with a 65 per cent chance in December as central bankers reaffirmed their stance of monetary policy to stop economies from slipping into deflation.

"While the move towards another Fed rate hike will likely cause bouts of consternation in investment markets I don't see the same degree of uncertainty that we saw around last year's Fed rate hike," Shane Oliver, head of investment strategy at AMP Capital in Sydney, wrote in a note. "It's clear from the Fed's actions this year that it is aware of global risks, the impact of its own actions on those risks and any potential blow back to the US economy and of the impact of a rising US dollar in doing some of its work for it."

Said Michael McCarthy, chief market strategist in Sydney at CMC Markets: "There will be some mild pressure on markets. The Fed remains very much data dependent, and that gives you the next hurdle for global markets which is the US non-farm payrolls on Friday. That now becomes crucial to the near-term direction of markets."

Markets will generally remain cautious before the September meeting, and will also take cues from the US jobs data, said Ong Kian Lin at RHB Securities Singapore Pte Ltd. "The most direct impact of the interest rate hike for emerging markets is on the local currency versus the dollar," Mr Ong said. "Once the dollar strengthens, it will impact oil producing countries that rely on the dollar movement for inputs."

The Topix index jumped 2 per cent at close as electrical appliance and carmakers gained. The yen extended declines after sinking 1.3 per cent on Friday.

The currency for the world's third-biggest economy suffered its biggest single-day drop in more than six weeks on Friday as BOJ governor Haruhiko Kuroda reiterated a pledge to ease monetary policy further if necessary, saying in comments at Jackson Hole that he would bolster economic stimulus "without hesitation".

All 10 industry groups in the Asian-ex Japan gauge fell. Lotte Chemical Corp slid to a two-month low in Seoul, dragging a gauge of materials producers to a three-week low. South Korea's Kospi index dropped 0.3 per cent, its fourth day of declines, capping the longest losing streak since July. Australia's S&P/ASX 200 Index sank 0.8 per cent, Singapore's Straits Times Index lost 0.7 per cent and New Zealand's S&P/NZX 50 Index decreased 0.3 per cent.

Hong Kong's Hang Seng Index lost 0.4 per cent, its third drop in four days, as real-estate companies sank on concern rising borrowing costs will dent the city's property market outlook.

A bull-market run in Hong Kong is tiring as an improving US economy scotches Brexit-fuelled optimism that higher borrowing costs were a remote prospect. The Shanghai Composite Index was little changed, with a 10-day volatility gauge falling to a two-year low.

Indonesia's Jakarta Composite Index dropped 1.3 per cent, extending declines for the second day. "Given investors were finding the right excuse to take profit post the recent rally, we believe Yellen's speech would have given investors the right excuse to sell," said Taye Shim, an analyst with Daewoo Securities, in a note. "We expect JCI (Jakarta Composite Index) to undergo a mild correction today."

Plastic products manufacturer Langgeng Makmur Industri Tbk PT, one of the biggest losers on the index, was down 9.76 per cent.

Vietnam's VN Index added 0.3 per cent after earlier surging as much as 1.8 per cent towards a 2008 high. "We believe that in the coming week, (Vietnam) market is likely to recognise positive correction and cumulation," Vietcombank Securities said in a note.

US shares rose slightly on Monday with investors' mood buoyed by hints from the US Federal Reserve of an interest rate hike because of strong growth. Traders seemed less certain with most world stock markets dipping as they tried to second-guess the Fed's timing of its next rate rise. FXTM Research Analyst Lukman Otunuga said in an investors' note that attention may now be focused on key jobs data, due to be released on Friday, "which if exceeds expectations could provide another compelling reason for the Fed to act". Wall Street stocks were 0.4 per cent higher in early trading.

In Europe,the Stoxx Europe 600 Index retreated 0.2 per cent to 342.98 at 2.41pm in London, paring earlier declines of as much as 0.7 per cent. "Declines today have a lot to do with the aftermath of Jackson Hole and raised expectations of a rate hike this year, so that leads to a bit of adjustment in the market," said Samy Chaar, a Geneva-based strategist at Lombard Odier, which manages about US$170 billion. "If they manage to raise rates, that will be relatively good news, but it does entail a little bit more tightening in the system." BLOOMBERG, REUTERS, AFP

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