29 January 2004, 09:15  Fed's words support daollar, spook bonds, stocks

SINGAPORE, Jan 29 - An unexpected change in the U.S. Federal Reserve's message to the markets suggesting it may be a step closer to raising interest rates supported the dollar but sent global stock and bond markets skidding. Asian stocks sank on Thursday morning with Japan's Nikkei Average <.N225> falling 1.03 percent to 10,740.75 ahead of key earnings reports from brokerages and tech firms. "There's a bit of caution after the Fed, but on the plus side the yen has stabilised a bit and the Nikkei has some solid technical support that is limiting its falls," said Koji Muneoka, head of domestic sales trading at HSBC Securities. MSCI's index of non-Japan Asian markets <.MSCIAPJ> was off 1.36 percent by 0230 GMT, in line with falls on major Wall Street indices. The Dow Jones Industrial Average <.DJI> fell 1.33 percent. The Nasdaq <.IXIC> sank 1.83 percent. In Asia, Hong Kong's Hang Seng Index <.HSI> was the hardest hit, sinking 1.51 percent. The territory's exchange rate link with the United States makes its asset markets highly sensitive to U.S. rate news. China plays <.HSCE> were the biggest early losers, sinking 2.5 percent on spreading fears of a bird flu epidemic. Sony Corp <6758.T> was down 1.85 percent after posting a 26.2 percent fall in group net profit on a slowdown in PlayStation 2 sales and the absence of hit movies. Electronics conglomerates Fujitsu Ltd <6702.T> and NEC Corp <6701.T>, and Japan's top brokerage Nomura Holdings <8604.T> are due to report on Thursday.
The dollar rose on short-covering after the Fed dropped the phrase referring to a "considerable period" of loose monetary policy from its statement. It kept interest rates unchanged. The market was careful about buying dollars before the Group of Seven (G7) industrial powers meets next week, yet was nervous about buying yen too aggressively on fears that Japan might again step in to sell yen after Wednesday's intervention. The euro stood at $1.2461 against the late U.S. level of $1.2480. The dollar hovered just above 106 yen , steady from late U.S. levels but up from an overnight low near 105.50.
The Fed's words shocked bond markets, sending U.S. treasuries sharply lower. Yields on the two-year note, the most sensitive to market thinking on monetary policy, spiked higher as analysts brought forward their forecasts for the timing of a first rate rise. It was the biggest one-day jump in two-year yields since mid-October, and short-term interest rate futures also slid. By the close, the benchmark 10-year note was down 27/32, nudging yields up to 4.19 percent from 4.09 percent late on Tuesday. The two-year lost 11/32, driving its yield to 1.82 percent from 1.65 percent. Japanese government bonds (JGB) fell more modestly than their U.S. counterparts, bullishly suggesting the market believed Japanese monetary policy would not be affected by U.S. policy, said Kazuhiko Sano, chief strategist and managing director at Nikko Citigroup in Tokyo. The yield on the benchmark 256th 10-year JGB <0#JPTSY=JBTC> edged up to 1.335 percent before easing back to stand at 1.325 percent, still up one basis point from Wednesday.
New Zealand's central bank surprised markets with a rate hike that drove the local stock market 1.4 percent lower. The Reserve Bank of New Zealand lifted its official cash rate by 25 basis points to 5.25 percent less than an hour after the U.S. Federal Reserve left its benchmark rate steady at one percent. The Australian dollar fell below 77 U.S. cents as the changing view of U.S. rates cast a shadow over its status as the highest yielder among the majors. Aussie stocks sagged as well, dropping 0.47 percent, to 3,264,2, off a fresh five-week low of 3,258.3 plumbed early in the session. Singapore's Straits Times Index <.STI> fell 1.2 percent, outpacing losses on South Korea's KOSPI <.KS11> and Taiwan's weighed index <.TWII>, which were both off 0.86 percent. Spot gold shrugged off news that Japan was considering raising the weighting of gold in its reserves, losing around $1 an ounce in early Asian trade on the back of a firmer dollar to trade at $409.25 an ounce. NYMEX crude oil futures were steady but traders expected bearish sentiment to prevail after speculators sold off long positions. NYMEX March crude was at $33.64 a barrel, up two cents.//

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