Don't Sleep on This Lull in Markets as Risks Mount: Taking Stock

(Bloomberg) -- There’s just not much that will stir Asia equity investors from their slumber lately, not even the Fed.

Some surprising comments from Federal Reserve Chairman Jerome Powell Wednesday sent U.S. stocks tumbling and the dollar higher, noting “transitory” factors may be responsible for persistent weak inflation and throwing cold water on hopes of an imminent interest-rate cut. The S&P 500 fell 0.8 percent, its biggest one-day drop since March.

The market “wants the Fed to recognize that inflation is low and consider cutting rates later this year, but when they say low inflation is transitory that sounds like they are in no hurry to cut rates and were maybe even thinking that if it bumps up we might talk about raising rates and I think that’s why the market had a bad reaction,” Jim Bianco, president of Bianco Research, said on Bloomberg TV.

Asia was largely unfazed. The MSCI Asia Pacific Excluding Japan Index eked out a small gain Thursday as key markets across the region, including Hong Kong and Singapore, returned from a holiday. Hong Kong, Taiwan and South Korea inched higher, while Australian stocks lagged.

One mitigating factor is that China and Japan are out on holiday for at least the rest of the week and trading volume across the region is mostly lower. Even so, the Asia index hasn’t done much of anything at all for a while now, failing to post a single one-day move of 1 percentage point or more since April 1.

Don't Sleep on This Lull in Markets as Risks Mount: Taking Stock

Asia stocks raced out to a hot start at the beginning of the year, fueled in part by optimism for a speedy resolution to the U.S.-China trade war, a dovish Fed pivot that put downward pressure on the dollar and some firming economic data. But global growth concerns have been a persistent thorn in the side of the equity rally all year and a spate of disappointing earnings from key technology hardware makers at the top of the index, including Samsung Electronics Co., have the Asia market now stuck in neutral.

As it has been all year, it may take some movement on the trade front to shake Asia out of its doldrums.

It’s possible the U.S. and China may announce a trade deal by May 10 as Chinese Vice Premier Liu He heads to Washington for more talks next week, CNBC reported, citing unidentified people familiar with the matter. The latest round of talks wrapped up in Beijing Wednesday, with U.S. Treasury Secretary Steven Mnuchin calling the meetings “productive” in a tweet.

Rising bond volatility recently may also be a precursor to bigger equity price swings, according to Olivia Engel, chief investment officer for active quantitative equities at State Street Global Advisors.

Don't Sleep on This Lull in Markets as Risks Mount: Taking Stock

“March has been marked with a rise in bond-market uncertainty, but not a rise in equity volatility,” Engel said in a note to clients. “This is unusual. Bond and equity market volatility typically move up and down together, and we believe this clustering of volatility across asset classes is likely to continue to hold. Investors should prepare for a change in risk appetite across markets.”

Stock-Market Summary

  • MSCI Asia Pacific Index ex-Japan little changed
  • Hong Kong’s Hang Seng Index up 0.6%; Hang Seng China Enterprises little changed
  • Taiwan’s Taiex index up 0.3%
  • South Korea’s Kospi index up 0.4%; Kospi 200 up 0.5%
  • Australia’s S&P/ASX 200 down 0.6%; New Zealand’s S&P/NZX 50 up 0.5%
  • Singapore’s Straits Times Index down 0.4%; Malaysia’s KLCI down 0.3%; Philippine Stock Exchange Index up 0.5%; Jakarta Composite down 0.7%; Thailand’s SET up 0.4%; Vietnam’s VN Index down 0.2%
  • S&P 500 e-mini futures little changed after index closed down 0.8% in last session

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