TOKYO (REUTERS, BLOOMBERG) - Asian shares fell and the US dollar stood tall on Thursday (Oct 29), after the Federal Reserve revived market expectations that it might still be on track to raise interest rates by year-end.
Wall Street ended a volatile session with solid gains, apparently underpinned by the Fed's vote of confidence in the US economy. But MSCI's broadest index of Asia-Pacific shares outside Japan extended losses to 1 per cent amid renewed concerns about the quality of Chinese growth and the impact of higher US rates on corporate earnings in the region.
Singapore's Sraits Times Index was down 0.65 per cent to 3,020.61 as of 12:21 pm.
Japan's Nikkei gave up early gains to slide 0.1 per cent. Australia's S&P/ASX 200 Index fell 0.5 per cent. The Hang Seng China Enterprises Index dropped 1.4 per cent in Hong Kong, while the Shanghai Composite Index fluctuated. Both gauges are heading for monthly gains in excess of 10 per cent.
The reaction in Asia was typical of recent tentative trading in global markets as the backdrop of slowing global growth left investors anxious over the Fed's policy path.
Indeed, S&P 500 e-mini futures edged down about 0.3 per cent in early Asian trading.
In overnight trading, US Treasury yields and the US dollar rose while Wall Street initially sold off and then reversed, after the Fed explicitly referred, in its statement at the end of its two-day policy meeting, to conditions necessary "to raise the target range at its next meeting."
Reference to a particular meeting is rare for the US central bank.
"There is no doubt an earlier move may give the markets greater clarity and more confidence," said Chris Brankin, chief executive officer of TD Ameritrade Asia in Singapore. "However, focusing on the timing is feeding uncertainty."
Another key signal was what it did not say about global conditions. When it held policy steady last month, the Fed expressed concern that a slowing global economy could threaten the US outlook, so investors viewed the absence of these worries in the latest statement as opening the door to a rate hike this year.
"The biggest market risk has been the removal of the premium in the US dollar on the theory that the risks to the global and domestic economy is/was enough to stay until next year," Evan Lucas, market strategist at IG in Melbourne, wrote in a note. "The market has been forced to reset its view on central bank differentials."
The US dollar declined 0.4 per cent to 120.70 yen after spiking as high as 121.26 on Wednesday from a session low of 120.02.
The dollar index, which tracks the US currency against a basket of six of its major peers, fell about 0.2 per cent to 97.559, but remained near the 2-1/2-month peak of 97.818 scaled after the Fed's message.
The euro extended its losses, slipping about 0.1 per cent to US$1.0929 after skidding to a 2-1/2 month low of US$1.0826 overnight.
The European Central Bank last week signaled its readiness to inject more stimulus to boost prices and the People's Bank of China followed with its sixth interest rate cut in less than a year and a reduction in the amount of cash banks must hold as reserves.
"Attempting to gauge the impact of potential policy easing by the ECB and recent interest rate cuts by the PBoC on the Fed's reaction function" is difficult, economists at Australia and New Zealand Banking Group wrote in a note. "However, the language in the statement suggests that any concerns that the Fed has in regards to a stronger US dollar have been offset by reduced financial market volatility and the prospect that policy easing in the above economies may act to boost global demand," they said.
Investors are speculating that the Bank of Japan could also expand its easing steps to keep economic recovery on track, but unexpectedly strong industrial output data on Thursday reduced the chance of the BOJ acting at its meeting on Friday.
US crude oil futures shrugged off the stronger dollar and retained most of their gains after soaring more than 6 per cent overnight as the government reported an inventory build-up, which triggered a short-covering rally after three days of losses.
US crude gave up about 0.3 per cent to US$45.82 a barrel. Brent slipped 0.1 percent to US$48.91.
Spot gold edged up about 0.4 per cent in Asian trade to US$1,160.06 an ounce, after skidding more than 1 per cent in the previous session in the wake of the Fed's hawkish message.