Asia markets a reluctant spectator to US political theatre


A man checks his smartphone in front of an electronic stock indicator displaying share prices of the Tokyo Stock Exchange in Tokyo, on Oct 31, 2018.
A man checks his smartphone in front of an electronic stock indicator displaying share prices of the Tokyo Stock Exchange in Tokyo, on Oct 31, 2018.PHOTO: AFP

SYDNEY (REUTERS) - Asian stocks were subdued on Monday (Dec 24) as investors fretted that political instability in the United States was leaving the country rudderless at a time when the global economy was showing signs of faltering.

Moves were limited by a holiday in Japan while many bourses are set to close early for Christmas. MSCI's broadest index of Asia-Pacific shares outside Japan lost 0.5 per cent to its lowest in seven weeks.

Yet Chinese blue chips managed to edge up 0.2 per cent, while E-Mini futures for the S&P 500 recouped early losses to rise 0.4 per cent.

US President Donald Trump's budget director and chief of staff on Sunday said the partial US government shutdown could continue into January, when the new Congress convenes and Democrats take over the House of Representatives.

Mr Trump on Sunday said he was replacing Defence Secretary Jim Mattis two months early, a move officials said was driven by the president's anger at Mr Mattis' resignation letter and its rebuke of his foreign policy.

Sources also told Reuters that Mr Trump has privately discussed the possibility of firing Federal Reserve chairman Jerome Powell, a move that would likely roil financial markets.

Treasury Secretary Steven Mnuchin felt it necessary to personally call the heads of the six largest US banks to calm nerves and made plans to convene a group of officials known as the "Plunge Protection Team".

"It provides more than enough fodder for perceptions of chaos and instability in the White House," said Mr Ray Attrill, head of FX strategy at NAB.

"At the same time, the government shutdown offers a true foretaste of what lies ahead once the new Congress in sworn in on January 3."

GLOBAL SLOWDOWN

The political uncertainty has only added to the air of risk aversion, punishing equities to the benefit of bonds.

The Nasdaq has fallen nearly 22 per cent from its Aug 29 high and into bear territory, while the S&P 500 was on track for its worst December since the Great Depression.

At the same time 10-year Treasury yields were near their lowest since August at 2.79 per cent, having fallen over 40 basis points in just six weeks.

The gap between two- and 10-year yields has shrunk to only 14 basis points, a flattening of the curve that has sometimes heralded economic turning points in the past.

"Many of the financial and economic indicators that turn first around business cycle peaks are now flashing red in advanced economies," warned Mr Simon MacAdam, global economist as Capital Economics.

"This is consistent with our view that the recent loss of momentum in the world economy will develop into a more severe slowdown in 2019."

The flight to safe havens was again boosting the Japanese yen, with the US dollar near a three-month trough at 111.02 yen on Monday.

It fared better on the euro, which was undermined by a run of poor data out of Europe. The single currency hovered at US$1.1376, after being as high as US$1.1485 last week.

Against a basket of currencies, the dollar index was a shade softer at 96.835.

In commodity markets, gold held near its recent six-month peak as the dollar eased and the threat of higher US interest rates waned. Spot gold stood at US$1,261.05 per ounce.

Oil prices were near their lowest since the third quarter of 2017, having shed no less than 11 per cent last week.

US crude was last unchanged at US$45.59 a barrel, while Brent dipped 12 cents to US$53.70