Monday, December 21, 2015

Asian stocks subdued, oil makes fresh low

Asian share markets got off to a lacklustre start on Monday following a dive on Wall Street, though losses were limited by a general lack of investor interest in a holiday-heavy week.

MSCI's broadest index of Asia-Pacific shares outside Japan was flat, while Australia's main index eased 0.2 per cent.

Japan's Nikkei slipped 0.9 per cent.

The market took a hit late Friday after the Bank of Japan announced some changes to its massive stimulus programme but stopped short of expanding the net amount of assets it buys, disappointing some who had hoped for a more aggressive move.

That in turn sent the yen broadly higher and caused some wild swings against the dollar. Early Monday, the dollar was down at ¥121.30 having briefly been as high as ¥123.58 on Friday.

The euro was little changed at $1.0863, while the dollar was a whisker firmer against a basket of currencies amid very light trade.

Wall Street also had a volatile end to the week with the expiration of stock and index options contracts generating heavy trading volume.

The Dow ended on Friday down 2.1 per cent, while the S&P 500 lost 1.78 per cent and the Nasdaq 1.59 per cent. For the week, the Dow fell 0.8 per cent, the S&P 500 0.3 per cent and the Nasdaq 0.2 per cent.

The flight from stocks was a boon for safe-haven bonds. Longer-dated Treasuries have been particularly popular as investors’ wager on the Federal Reserve is well ahead of the curve on inflation after last week's rate hike.

The global background is also one of disinflation given the weakness in oil and other commodity prices and the mounting spare capacity in major exporters such as China.

Inflation expectations for five years ahead have taken a marked turn lower this month, dropping to 2.11 per cent from a high of 2.24 per cent.

The resulting rally in longer-dated Treasuries has flattened the yield curve with the gap between two-year and 10-year paper shrinking to 123 basis points, the smallest since early February.

A flatter curve is bad news for bank profits since they essentially make money from borrowing short and lending long, and could be one reason US bank stocks fell hard late last week. Financial stocks were the worst-performing S&P sector on Friday.

There was no respite for oil prices as a glut of supply left both Brent and US crude down around 35 per cent for the year so far.

Brent was quoted off 35 cents at $36.53 a barrel and touched a new seven-year low at $36.32. A break of $36.20 would take it to ground last trod in 2004. US crude lost 25 cents to $34.48 a barrel.

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