Asian stocks tread water on wary outlook; bonds firm

Reuters: Asian shares hovered near a two-month low on Wednesday, as investors shrugged off an overnight rally in global stocks and looked to bonds in the absence of signs of a sustainable recovery in China and other emerging markets.

MSCI’s broadest index of Asia-Pacific shares outside Japan was flat after spending most of the morning session in negative territory. On Tuesday, it hit an eight-week low.

Reflecting the cautious mood in Asia, European shares were expected to open broadly steady.

Hong Kong shares led regional stocks lower with the benchmark index falling 0.8%, followed by Korea down 0.03% and Taiwan losing 0.3%. They are most vulnerable to weakness in the Chinese economy.

While strong March data out of China had raised hopes that its economy was turning the corner, mixed data so far in April and surging debt levels in a variety of industries has fuelled doubts about the sustainability of any recovery in growth.

A front page article in the official People’s Daily this week that said China’s economic trend would be “L-shaped” reinforced investors’ doubts over the stock market’s potential.

“You don’t expect a bull market in an L-shaped economy,” said David Dai, Shanghai-based investor director at Nanhai Fund Management Co.

Japanese shares were among the rare bright spots in the region, with the Nikkei up 0.3% as the yen moved further away from the 18-month highs against the dollar struck last week. Overall sentiment remained cautious.

“I’d think the markets are supported by lack of negative news flows. It’s not that we have clear reason to be positive about the global economy but there may be a bit of unwinding in excessively pessimistic bets,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities.

On Tuesday, MSCI’s broad gauge of global stocks climbed nearly 1.1%, its best session in about a month. The US S&P 500 jumped 1.3%, tallying its best day in two months.

Bonds remained well supported, indicating investors were wary about the prospects for riskier assets in the near term in an environment of sluggish global growth.

An auction of three-year US notes on Tuesday was received well. Yields on 10-year debt were at 1.75%, not far away from a 2016 low of 1.53%.

Japanese government bonds also reflected the cautious undertone in global markets, with the yield 10-year bonds staying stuck in a narrow range around 0.095%.

In credit markets, a high yield corporate bond Exchange traded fund (ETF) and its investment grade ETF counterpart have risen in recent weeks indicating a growing preference for bonds.

In the currency market, the yen stayed on the defensive, following two sessions of steep declines after Japanese officials stepped up warnings about potential intervention to weaken the currency.

The yen was trading at 108.76 to the dollar, having slipped 3% from its 18-month high of 105.55 set on 3 May.

The dollar got broad support from comments by a top Federal Reserve official last week, which kept alive otherwise diminishing hopes of a Fed interest rate hike following soft US payrolls data last Friday.

New York Fed President William Dudley said that it was reasonable to expect the US central bank would raise interest rates twice in 2016.

The dollar’s index against a basket of six major currencies rose to a near two-week high of 94.150 on Tuesday and last stood at 94.124, having recovered 2.5% from its 16-month low touched on Tuesday last week.

The euro traded at $ 1.13820, retreating further from a 2016 high of $ 1.16160 tested last week.

Oil prices were supported by disruptions to crude supplies in Canada, Nigeria and elsewhere.

Brent crude futures dipped to 45.28 per barrel, having jumped 4% on Tuesday. US crude futures were at $ 44.40 per barrel. Both were off about 0.5%.