Asian stocks gains as dollar slide boosts oil prices
SYDNEY : Asian shares rallied on Thursday as speculation the U.S. Federal Reserve might not raise interest rates at all this year hammered the dollar and sparked a huge rally in oil prices.
By some measures the U.S. currency suffered its largest one-day percentage drop outside of the crises of 1998 and 2008, symptomatic of just how crowded bullish positions had been.
The sudden reversal provided a much-needed boost to beleaguered commodities, sending oil up no less than 8 percent, and easing pressure on energy shares and risk appetite.
That relief showed in equity markets where MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 1.9 percent. Australia’s resource-heavy index rose 1.7 percent and South Korea 1 percent.
In China, the Shanghai Composite Index gained 1.8 percent as trade wound down ahead of the Lunar holidays. Hong Kong stocks leaped 1.7 percent, in part because the U.S. dollar’s fall lessened strains on the HK dollar’s peg.
Japanese investors seemed less happy with the yen’s new found strength against the dollar and nudged the Nikkei down 0.7 percent.
Wall Street had taken its cue from oil and recouped early losses on Wednesday, in a wild session that saw the Dow swing in a 420-point range.
The Dow ended on Wednesday up 1.13 percent, while the S&P 500 added 0.5 percent and the Nasdaq Composite eased 0.28 percent.
Investors took that to mean the Fed did not want to see the currency rise any further and might delay further increases in interest rates. Futures markets had already priced out almost any chance of a hike in March and imply a funds rate of just 0.51 percent by December.
The current effective funds rate is 0.38 percent. The impact is amplified by a surprisingly soft reading on the U.S. services sector, just the latest in a string of disappointing economic indicators.
The market reaction was swift and violent with the dollar collapsing through a host of key chart levels and triggering waves of stop-loss selling.
The dollar was down at 118.02 yen having shed 1.7 percent overnight in its biggest daily drop since August.
The fall wiped out all the gains from the Bank of Japan’s decision to cut its rates below zero, a tit-for-tat response that only added to market suspicions central banks were engaged in a war of competitive depreciation’s.
Against a basket of currencies, the dollar was pinned at 97.351, after shedding 1.6 percent on Wednesday. The euro was enjoying the view at $1.1085, having climbed 1.7 percent on Wednesday.
The drop is a boon to commodities priced in U.S. dollars, lifting everything from copper to gold to oil.
Brent futures put on another 30 cents to $35.34 a barrel, on top of a 8.4 percent gain overnight. U.S. crude added 36 cents to reach $32.64. Spot gold was up at $1,141.00 an ounce and near its strongest since Oct. 30.
Traders are unsure what triggered the dollar rout though many pointed to comments from President Federal Reserve Bank William Dudley at New York, that tighter financial conditions would be taken into account at the next policy meeting in March.
Dudley also warned that a sharp rise in the dollar could have “significant consequences” for the U.S. economy.