Asia hit by Wall St’s tumble, China stock indexes lose 6%

TOKYO (Reuters) - Asian shares sank on Friday, with Chinese equities on track for their worst day in two years, as fears of higher U.S. interest rates shredded global investor confidence.

There was limited immediate market reaction to the U.S. government staggering into another shutdown after Congress missed a Thursday midnight deadline to renew funding.

S&P mini futures retained modest gains and were last up 0.4%.

Spreadbetters expected Europe markets to start lower, forecasting an 0.8% drop for Britain’s FTSE, and declines of 0.2% for Germany’s DAX and France’s CAC.

On top of pressure from the drop in global shares, Chinese equities were weighed down as investors sought to stay liquid ahead of the Lunar New Year holidays and pressure was felt to meet rising margin calls. 

The Shanghai Composite Index tumbled 6.0% to its lowest since May 2017, and the blue chip CSI300 index dived as 6.1%. Both indexes were on track for their largest single-day losses since February 2016.

Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong, said Chinese shares slid mostly because of the U.S. correction but he had some China-specific worries.

He said he now is neutral on China equities “due to two concerns: valuations on China-consumer related industries and execution risks on deleveraging (more specifically financial deleveraging)”.

Japan’s Nikkei shed 2.9%, en route for a weekly loss of 8.6% - its biggest since February 2016.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 2.2% to a two-month low. The index, which hit a record high on Jan. 29, was on track for its sixth straight day of losses and stood to fall 7.6% on the week.

 “The correction phase in equities could last through February and possibly into March,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management in Tokyo.

 “The rise in long-term U.S. yields will have to settle for the correction phase to end. The surge in volatility has also prompted investors to sell risk assets, in turn feeding volatility.”

U.S. markets remained the epicenter of the global sell-off, with the Dow plunging 4.1% and the S&P 500 sinking 3.7% overnight.

With Thursday’s losses, both the S&P 500 and the Dow slid into correction territory, falling more than 10% from record highs of Jan. 26. 

Higher yields are seen hurting equities as they increase borrowing costs for companies and reduce their risk appetite. They also present a fresh alternative to investors who may reallocate some funds to bonds from equities.

The yield on the benchmark 10-year Treasury note rose as high as 2.884% on Thursday, just below Monday’s four-year high of 2.885%. It last stood at 2.8310%. Treasury yields were pushed higher after the Bank of England said British interest rates probably need to rise sooner, adding to expectations of reduced central bank stimulus globally, compounded by U.S. Senate leaders agreeing to a budget deal that would increase government borrowing. 

Treasury yields have been shoved up by the prospect of increased debt issuance to fund fiscal spending under U.S. President Donald Trump, inflation worries, and expectations of the Federal Reserve raising rates sooner and more frequently than was expected.

 “An increase in fiscal spending ahead of the U.S. midterm elections has caused the Fed to brace for inflation accelerating and the economy overheating. This led yields higher, ultimately triggering the fall in equities,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities in Tokyo.

It could be up to new Fed Chair Jerome Powell to restore calm in the financial markets, he said.

In currencies, the dollar edged up 0.2% to 108.985 yen , after slipping 0.5% overnight. For the week, it was on track to lose 1.5% against its Japanese peer amid risk aversion in broader markets. The Swiss franc dipped 0.2% to 0.9383 franc per dollar after advancing about 0.7% the previous day.

The euro added 0.1% to $1.2259 . The dollar index against a basket of six major currencies was flat at 90.249 after touching a two-week high of 90.567 overnight.

The pound rose 0.1% to $1.3933 . It had reached $1.4067 overnight following the hawkish BoE comments.

Oil falls for sixth day as supply fears mount

REUTERS: Oil prices fell for a sixth day on Friday after Iran announced plans to boost production and US crude output hit record highs, adding to concerns about a sharp rise in global supplies.

The falls come amid a rout in global share markets as inflation fears grip investors.

Brent futures were down 44 cents or 0.7%, at $ 64.37 a barrel by around 0700 GMT. On Thursday, Brent fell 1.1% to its lowest close since Dec. 20.

US West Texas Intermediate (WTI) crude was down 62 cents, or 1%, at $ 60.53 a barrel, having settled down 1% in the previous session at its lowest close since Jan. 2.

Both contracts have fallen more than 9% from this year’s high point in late January.

“Bets on further rising oil and metals prices, for example by hedge funds, have climbed to excessively bullish levels,” said Carsten Menke, Commodities Research Analyst at Swiss Bank Julius Baer.

“We see oil prices dropping towards and below $ 60 per barrel,” he said.

OPEC member Iran on Thursday announced plans to increase production within the next four years by at least 700,000 barrels a day.

Meanwhile, the US Energy Information Administration (EIA) this week said crude production last week rose to a record high of 10.25 million barrels per day (bpd).

At that level, US production would overtake the current output in Saudi Arabia, the biggest producer in the Organization of the Petroleum Exporting Countries (OPEC).

OPEC and other producers, including Russia, have cut production since January 2017 to force down global inventories, but these cuts have been offset by rising US oil production.

China plans to launch its long-awaited crude oil futures contract on March 26, two sources familiar with the situation said on Friday, a move that will potentially shake up the pricing of the world’s largest commodity market.

The launch next month will mark the end of a push to create Asia’s first oil futures benchmark, which would give China more clout in pricing crude in the region and a share of the trillions of dollars in the oil futures trade.