Oil Weighs on Asia, Nikkei Slips on Disappointment

Asian markets closed mixed as energy stocks dragged the region down.

Oil Weighs on Asia, Nikkei Slips on Disappointment

By: Faraz Haleem Published:
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Asian markets closed mixed as energy stocks dragged the region down

Asian equity markets finished mostly lower on Tuesday due to the energy sector. The region traded dull as investors seemed hesitant to participate in trading.

Reserve Bank of Australia

Following record-low inflation, the Reserve Bank of Australia (RBA) cut interest rates by a fourth of a percentage point, taking it to 1.50%. Since May, it is the first cut executed by the bank. The step, however, has conveniently lessened the risk of elevating house-price growth.

Governor of the central bank, Glenn Stevens said: “The board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”

According to the official figures from last week, the annual inflation in the second quarter has hit close to 1.5%, which is substantially lower than RBA’s target band of 2% to 3%. The inflation, naturally, has created quite a stir among policymakers and analysts. Policymakers have voiced their concerns over low inflation. They fear that the latter would affect business and household wage and price-setting behaviors.

Post the bank’s decision, Australia dollar fell almost half a cent at US$0.7500. As of late, the local currency has been quite high. This imbalance has harmed the services industries, including but not limited to education and tourism industry.

In a similar fashion, neighbor New Zealand is dealing with almost the same pressure. Its inflation rate is a mere 0.4% with immense pressure on central banks to reduce rates at a policy meeting scheduled to take place next week.

Mr. Stevens summarized the decision in the following words: “All this suggest that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.”

Crude

Oil prices plunged to the key level of $40 per barrel, pressured by weak market fundamentals. WTI futures, with September delivery, fell to $39.89 per barrel, while global trademark Brent, with October delivery, slipped to $42 a barrel, as of 3:54 AM BST.

Overnight, oil prices fell 4% to settle below $40 per barrel, for the first time since April on fears of a crude glut. American futures lost 15% of their value in July, pushing hedge-fund managers to liquidate their long positions.

Oil prices have recovered since hitting $26 per barrel in February — their lowest in 13 years. Unexpected supply disruptions from wildfires in Canada to rebels’ attacks in Nigeria supported the rally. However, as soon as supply interruptions faded, oil market flooded with excess supply, turning investors bearish.

The market is oversupplied that even supply outages are not enough to offset the fall in crude. The pace of rebalancing is also slow even geopolitical factors such as rebels’ attacks in Nigeria are not weighing on excess supply.

Libya’s expected return to oil market, along with a recent upward trend in US drilling activities, has also added to bearish sentiments among investors. Given the current market conditions, some analysts expect a $35 per barrel price in the near term.

Greenback

The US currency continues to trade under pressure since last Friday, as investors have turned bearish due to weaker-than-expected economic growth in the world’s biggest economy. Bloomberg dollar spot index, which measures the greenback against a basket of currencies, fell 0.32% to 95.408, as of 6:24 AM EDT.

A gloomy economic outlook has made investors hesitant to take shelter in the US currency due to their falling risk appetite. Bullish sentiments were built last week, following the monetary policy meeting, in which Fed added to the hopes of a rate hike as soon as in September.

The Federal Reserve also stated that downside risks have faded, signaling rate hike at least in the second half of the year as previously investors lost hopes of a rise in interest rate due to flattering economic conditions.

Volatility would continue to persist as economy is still some under downward pressure. Next few months would be crucial to assess Fed’s intention of a rate hike, based on upcoming economic data.

Japan

Japanese investors remained on the sidelines today, reversing yesterday’s gains as stimulus package disappointed them. Nikkei 225 shed 244 points, dragged by energy and financials sector to finish 1.47% lower, taking biggest hit in the region.

Earlier today, Japanese Prime Minister Shinzo Abe's cabinet approved $132 billion (13.5 trillion yen) in fiscal measures as Bank of Japan did not extend monetary support as the government had anticipated.

Last week, ahead of central bank’s policy meeting, Mr. Abe extended pressure on the bank to ease monetary policy by announcing hefty stimulus package of $265 billion. The announcement pushed market expectations, but investors lost confidence today, following the cabinet’s approval.

Following the disappointment, yen gained strength against the dollar due to buying pressure, mainly due to hopes of a possible intervention. The dollar-yen pair was trading at 101.77, boosting by 0.7%, as of 6:56 AM EDT.

On the back of strong yen, major exporters finished lower with Honda Motor Co Ltd, Toyota Motor Corp, and Sony Corp shares falling 2.90%, 1.74%, and 0.84%, respectively. Generally, a stronger yen is seemed as negative for exporters as it weighs on their foreign earnings when converted back into local currency.

Among oil shares, Inpex Corp plunged 5.51%, while Showa Shell Sekiyu KK dropped 3.52%, sending energy sub-sector 3.60% lower due to weak oil prices.

China

Mainland shares crawled back on yesterday’s losses in volatile environment, as investors seemed hesitant to participate in trading today. Shanghai stock exchange composite oscillated between gains and losses throughout the session as a rally in industrial and technology sector was offset by selling pressure in utilities and consumer staples sector. The index, however, added 18 points at the close of trade, pushing benchmark 0.61% higher. CSI 300 index also finished up 0.39%, adding 12 points.

Yesterday, contradictory manufacturing data from officials and private surveys painted a muddled economic picture, adding to the confusion over economic outlook. Overall, Chinese investors are bearish on the economy due to weak fundamentals.

In the currency market, the Chinese central bank cut yuan daily reference rate to 6.6451 per dollar, lowering by 174 basis points despite weakness in the US dollar. Some analysts showed concerns that China may again start devaluing yuan to counter falling exports.

Oil shares traded mixed with Sinopec Oilfield Service Corp and PetroChina Company Limited shares surging 1.59% and 0.28%, respectively, while China Petroleum & Chemical Corp finished down 0.21%, sending energy sector 0.35% higher.

Australia

Australian investors also remained on the sidelines, as country’s central bank shocked market by cutting benchmark rates to support growth in the economy. S&P/ASX 200 gave up yesterday’s gains, dragged by energy and consumer discretionary sector. The index finished 0.84% lower, shedding 47 points despite starting off strong.

Analysts feel the central bank may cut rates further to underpin growth in the economy as inflation is still under pressure.

Among miners, BHP Billiton Limited fell 2.19%, while Rio Tinto Limited slipped 0.58%. Energy sector closed down 3.21%, while Santos Ltd and Woodside Petroleum Limited fell 5.79% and 2.22%, respectively, due to the recent decline in oil prices.

Hong Kong

Financial markets in Hong Kong remained closed due to a typhoon warning issued by the Hong Kong Observatory.

Street’s View

Overnight, major equity markets slipped broadly due to selling pressure in the energy sector due to weak oil prices. Dow Jones Industrial Average fell 0.15%, while S&P 500 slipped 0.13% at the close of trade. However, NASDAQ added 22 points to finish up 0.43%.