Forget Iran Sanctions. North Korea, Dollar Key for Asian Stocks

(Bloomberg) -- It’s no surprise that most Asian stock markets began the day slipping after Trump’s decision to exit the 2015 Iran nuclear accord and reinstate sanctions. But the declines weren’t severe.

The MSCI Asia Pacific Index lost 0.3 percent at 12:42 p.m. in Hong Kong, paring a drop of as much as 0.6 percent. Futures contracts on the S&P 500 Index rose less than 0.1 percent, mimicking Tuesday’s index move. Volatility indexes across the region were mostly down.

Forget Iran Sanctions. North Korea, Dollar Key for Asian Stocks

It might be because there’s a lot to focus on within the Asian continent.

“Trump’s exit from the landmark 2015 accord is an important piece of news flow,” said Jason Low, a senior investment strategist at DBS Wealth Management. “But in the greater scheme of things happening right now, perhaps pales in relative importance compared to the political meetings happening in North Asia.”

This week has been a busy one for the region:

  • Trump discussed trade and North Korea with China’s President Xi Jinping on Tuesday
  • A U.S. envoy to the World Trade Organization condemned China’s trade policy at a summit in Geneva
  • U.S. Secretary of State Mike Pompeo arrived in North Korea to prepare for Trump’s summit with Kim Jong Un
  • Xi met Kim for a second time in two months earlier this week
  • Japan Prime Minister Shinzo Abe hosts South Korean President Moon Jae-in and China’s premier Li Keqiang

Also read: Higher Oil Is Not a Problem for Stocks, UBS Investment Head Says

Here’s what fund managers and strategists are saying:

Need Clarity

“It’s not clear just how impactful the sanctions will actually be given that the other signatories to the Iran deal have not supported the move,” said Kerry Craig, a Melbourne-based global market strategist with JPMorgan Asset Management. “Need clarity over whether sanctions will apply to only Iranian companies or non-Iranian ones, and there is still a six-month window of negotiation to be had and the markets may be hoping for a successful resolution.”

Macro Risks

“What really matters for Asia stocks are macro risks: primarily the dollar index at a 2018 high but also future directions of U.S. Treasury yields,” Frank Benzimra, head of Asia equity strategy at Societe Generale SA, wrote in an email.“Our reading of U.S. conditions is not bullish dollar, which makes emerging Asia an attractive place to invest, especially when we see some market corrections such as in Indonesia.”

Stronger Dollar

“For me, the stronger U.S. dollar, which is running like a wrecking ball through global capital markets, is one of the more significant issues,” said Stephen Innes, head of trading for Asia Pacific at Oanda Corp. “I think the market is preparing for higher U.S. interest rates and the long-awaited draining of the QE punch bowl. Both of which are bad for equity markets.”

Not a Big Deal

“Other than the oil sensitive sectors (oil, airlines, etc.), it’s not a huge concern. What has been a bigger issue is the strong U.S. dollar,” James Soutter, head of global equities at K2 Asset Management in Melbourne, wrote in an email. “Asia is far more focused on North Korea -- I would say with hopeful eyes rather than trepidation. That said, its still an uncertain time and once there is greater clarity Asian markets may start to respond to fundamentals again.”

$85 Oil

“Everybody is waiting for U.S.- China trade tensions and Korean peninsula issues to resolve. The market is just overwhelmed by oil prices, Korea and U.S.-China trade talk,” Edward Lim, chief investment officer of Covenant Capital Pte. in Singapore said by phone. “The immediate risk is how oil price behaves regardless of what happens in Korea and U.S-China trade. If it goes to $85 we will be in trouble.”

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