The dollar came off an eight-month low and Asian markets edged higher on Wednesday as investors hoped the first partial U.S. government shutdown in 17 years will be short-lived and not snuff out a spreading but still tepid economic recovery.
Because of the shutdown, investors may face a period when they cannot take cues from key U.S. government data, like the monthly jobs report which is due on Friday but might not come out.
The first significant private survey after the shutdown began – the Institute of Supply Management’s report on manufacturing – showed the fastest expansion in almost 2-1/2 years, which helped Asia stocks.
Next up to help gauge health of the U.S. economy is the ADP private sector payrolls report, due later on Wednesday.
A drop-off in U.S. economic data at a time when the Federal Reserve has muddied expectations on when will it start reducing its stimulus could hit demand for risky assets.
Echoing those concerns, European stocks are seen opening flat to slightly lower with spreadbetters expecting Britain’s FTSE 100 to open 9 to 15 points lower, or as much as 0.2 percent, Germany’s DAX to open 3 to 5 points higher, or as much as 0.1 percent, and France’s CAC 40 to open 9 to 10 points lower, or as much as 0.2 percent.
In currencies, the euro eased to $1.3523, having hit an 8-month high of $1.3589 in European trade on Tuesday, ahead of a European Central Bank policy meeting later in the day where it is widely expected to stick to its policy course.
Against the yen, the dollar fell back to 97.71 yen after being up as much as 98.09 earlier in the day, reflecting the broader cautious sentiment in the markets.
Despite, the weak tone, the dollar is expected to remain supported from Japanese buyers and foreign players.
The failure of the U.S. Congress to agree on a bill that funds government operations meant up to one million workers were put on unpaid leave, as Democrats and Republicans fight over President Barack Obama’s healthcare program.
For Asian shares, the impact of the ISM manufacturing report was reduced by the government shutdown.
The MSCI’s broadest index of shares outside Japan .MIAPJ000PUS was up 0.3 percent.
U.S. S&P futures eased 0.2 percent after the cash index .SPX advanced 0.8 percent on Tuesday.
Japan’s Nikkei .N225, the most expensive in Asia based on price-to-earnings ratios, came in for profit-taking and ended the day down 2.2 percent.
Early gains for Korean stocks were erased, those in Indonesia .JKSE were pared to 1.2 percent. China and India were closed for holidays.
“Markets are taking it one day at a time with a near-term impact unlikely and any prolonged government deadlock only increases the likelihood of a delay in U.S. tapering,” said Kenneth Akintewe, a Singapore-based portfolio manager at Aberdeen Asset Management.
Citi strategists also believe shutting down the U.S. government reinforces the chance that QE tapering will be delayed. Also, they say an additional 10-15 basis points drop on the 10-year Treasuries to 2.50 percent “would not be inconceivable”.
Yields on 10-year bonds have fallen by nearly 40 basis points from a September high of nearly 3 percent, erasing a large chunk of the rise from May 22, when the Fed first hinted at withdrawing its policy easing. On Wednesday, 10-year U.S. Treasury futures were flat on the day.
DEFENSIVE STANCE
While that drop in U.S. yields has widened the gap in the favor of emerging market debt, recent flows suggests investors are still wary of buying Asian bonds, instead preferring to venture cautiously into shorter-dated emerging market bonds or even staying in cash.
Emerging market bond funds saw their first weekly inflow in the week ended September 25 after 17 straight weeks of outflows, during which more than $25 billion was withdrawn.
Buying relatively safe haven stock markets of Korea and bonds with short maturities rather than venturing into the riskier, heavily foreign-owned markets of Indonesia and India still remained the flavor of the day, according to a trader.
Aberdeen’s Akintewe said that despite the drop in U.S. yields, “there is still a big likelihood of a steepening of the U.S. yield curve and as a result, investors don’t want to be aggressive about taking duration risk at this stage.”
In commodity markets, gold hit a two-month low below $1,300 an ounce. Copper futures dipped 0.2 percent after posting their biggest quarterly gain since March 2012 thanks to steadying global growth.
Oil prices softened as a result of the government gridlock with the November contract down 0.48 percent to $107.56 per barrel.
Source : Reuters
