(Bloomberg) -- There are a plethora of reasons out there to sell equities today.
Risks of a Federal Reserve’s interest rate hike in June moved front and center Thursday, jostling for position with a simmering China-U.S. trade war, and weaker currencies on the growing list of headaches for stock investors in Asia.
And the “sell in May” theory might come into fruition this year: the MSCI Asia Pacific ex-Japan Index fell 0.5 percent to extend a three-day slide as most markets in the region followed U.S. stocks lower. Hong Kong’s Hang Seng Index slumped as much as 2 percent, while benchmarks in Indonesia and the Philippines tumbled at least 2.5 percent. Japan remained closed for a holiday.
The Fed, which held rates steady for May, said inflation will run near its target over the medium term and it expects economic conditions to evolve in a manner that will warrant further gradual increases in the federal funds rate.
“The Fed’s outlook on rising inflation is bad for stocks as it confirms the prospects of three to four rate hikes this year, with the earliest in June,” said Lex Azurin, an analyst at AB Capital Securities in Manila. Returns for stocks will get smaller in a period of rising interest rates and inflation, he said.
The Fed’s decision to stay the course will continue to boost the dollar and weigh on the Hong Kong dollar and stocks, according to Ken Chen, Shanghai-based analyst with KGI Securities.
“Share prices are adjusting to reflect valuations that the market thinks should compensate for rising interest rates and inflation,” said Jonathan Ravelas, chief market strategist at BDO Unibank Inc. “The decline in share prices also reflects that many investors priced in two rate increases this year, but with the recent Fed statement it will be more of three adjustments.”
The ongoing trade spat between the U.S. and China remains a factor for investors, with a senior China government official saying the nation won’t succumb to “threats” from the U.S., spurring speculation the conflict won’t be defused any time soon.
“Concerns about trade is still an overhang to the market, as investors do not see a possible way for an immediate solution,” said Linus Yip, chief strategist with First Shanghai Securities.
Along with Hong Kong, investors in Indonesia are also in a selling mood. The rupiah slumped for a fourth day to a 2016 low, while the stocks benchmark retreated as much as 2.5 percent.
“The depreciation of the rupiah continues to hurt sentiment among equities investors,” said John Teja, director at PT Ciptadana Sekuritas Asia, in a text message. “Weaker than expected April inflation data on Wednesday also signals that consumption was still weak.”
“Who wants to buy stocks in a country where the currency is weakening?” said Stephen Innes, head of trading for Asia Pacific at Oanda Corp., in a phone interview. “We seem to be moving from what appeared to be a synchronized global growth narrative only a few weeks ago to a synchronized global downturn.”
While global markets aren’t going entirely risk-off just yet, equity investors are starting to take on a “this is as good as it’s going to get” view by taking a more defensive posture against rising rates and the ongoing trade conflict, instead of chasing corporate earnings, Innes said.
Australia is outperforming the region, climbing for a fifth consecutive day in a longest winning streak since April 19, reversing the losses suffered since February. Raw-materials producers and financials paced gains.
It’s “quite unusual” for Australia not to follow leads from international markets, said Julia Lee, an equity analyst at Bell Direct. There’s some technical buying after the benchmark index broke through the 6,000 point barrier, she said. “It looks like there’s a little bit of optimism on the Aussie market.”
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