A global equity sell off deepened in Asia amid signs of an oversupply in commodities and as concern grows that stocks have become too expensive, while there remains uncertainty about U.S. tax reform. The Australian dollar slid on weak wage data.
Mining, oil and metal stocks were among the biggest losers on the Topix index, which is on track for its steepest slide since March as Japan’s benchmarks retreated further from quarter-century highs reached last week. S&P 500 Index futures declined following losses on the cash equity measure. A Bloomberg commodities gauge added to its biggest drop in six months and crude oil extended declines after the International Energy Agency cut its forecast for demand and cautioned the global market will remain oversupplied. Strong growth in Germany and Italy buoyed the euro, while the dollar traded near a three-week low and Treasuries climbed. Nickel led declines in commodities.
“The Topix is still up 8 percent over the last three months,” James Soutter, a portfolio manager at K2 Asset Management Ltd. in Sydney, said. You have “concerns that tax reform will take longer in the U.S., which it will, and some economic data that was slightly mixed. There is a little heat coming out, but it should present an opportunity to reload soon.”
Morgan Stanley echoed a similar sentiment, advising staying overweight equities even as valuations appear stretched and to avoid the temptation to sell during pullbacks. Current indicators used by the New York-based bank’s cross-asset strategy team are showing strong macro-economic data, favoring a tilt to stocks, with low allocation to high-yield credit.
Stocks have made little headway this month as scant progress on U.S. tax reform and record high levels for many markets restrict appetite for risk-taking investments. Attention now turns to U.S. consumer prices and retail sales for clues on the strength of the world’s largest economy after the flattest American yield curve in a decade raised concern that growth will slow.
A record number of investors in a recent survey of global money managers from Bank of America Merrill Lynch said equities are overvalued. The investors are divided over the likely impact of the White House’s tax agenda next year, with one camp expecting it will yield no change to the economic outlook, and the other saying the reform will spur inflation.
The House may vote on its version of the tax cut bill as soon as Thursday, while the Senate continues to hammer out its take. Goldman Sachs Group Inc. economists said in a note Tuesday the debate is moving faster than they expected, boosting the odds that tax reform will be enacted by early next year to 80 percent from 65 percent.
Japan’s economy grew for a seventh straight quarter, its longest expansion since 2001, benefiting from government fiscal stimulus and massive Bank of Japan monetary easing. A recovery in exports and rising business confidence offset a decline in consumer spending to underpin a 1.4 percent increase in gross domestic product in the third quarter from the previous three-month period.
Terminal users can read more in our Markets Live blog.
Here are some key events investors are watching this week:
- Bank of England officials address the bank’s future on Thursday, while European Central Bank chief Mario Draghi speaks Friday.
- A string of Fed appearances may further illuminate the FOMC’s commitment to a December hike.
- U.S. CPI and retail sales data will be released Wednesday morning.
These are the main moves in markets:
- The Topix lost 1.9 percent as of 2:11 p.m. Tokyo time. The Nikkei 225 Stock Average was down 1.5 percent.
- Australia’s S&P/ASX 200 Index declined 0.6 percent and the Kospi index in Seoul was down 0.2 percent.
- Hong Kong’s Hang Seng Index fell 0.9 percent and the Shanghai Composite Index was down 0.8 percent.
- Futures on the S&P 500 decreased 0.3 percent. The underlying measure dropped 0.2 percent on Tuesday.
- The Bloomberg Dollar Spot Index lost 0.4 percent, down for a fifth day, after touching the lowest in almost three weeks on Tuesday when it slid 1.2 percent.
- The yen was up 0.2 percent to 113.19 per dollar.
- The Aussie dollar slid 0.6 percent to 75.85 U.S. cents. An index of wage prices rose less than expected in the third quarter.
- The euro was at $1.1792 after surging 1.1 percent.
- The British pound was at $1.3142, down 0.2 percent.
- The yield on 10-year Treasuries fell more than one basis point to 2.36 percent, extending a drop on Tuesday.
- Australia’s 10-year yield slid more than six basis points to 2.59 percent after the wages data.
- West Texas Intermediate crude fell 1.2 percent to $55.02 a barrel, following its 1.9 percent slide on Tuesday.
- Gold was flat at $1,281.48 an ounce after rising for two days.
- LME nickel added to a slide on Tuesday when it dropped 5.7 percent to 11,780 a metric ton, its biggest drop since March.
— With assistance by Abhishek Vishnoi