Shares struggle as Fed disappoints

2012-06-21 09:12

Singapore - Asian stocks outside Japan slipped and commodities fell broadly on Thursday after the Federal Reserve ramped up monetary stimulus by expanding Operation Twist but disappointed some investors who had been hoping for more aggressive measures.

The US central bank, as expected, extended its programme of selling short-term securities and buying longer-dated ones, a move aimed at driving down borrowing costs, but did not signal a third round of quantitative easing.

MSCI's broadest index of Asia Pacific shares outside Japan fell 0.8%, Brent crude oil slid to an 18-month low and the Australian dollar, sensitive to commodities demand, also lost ground.

Sentiment was not improved by closely watched data from China, where HSBC's flash purchasing managers index showed the factory sector contracted for an eighth straight month in June, with export orders and prices at their weakest since early 2009.

Japan's Nikkei share average bucked the trend, rising 1% after the Fed's decision to restrict itself to extending Operation Twist to the end of the year weakened the yen against the dollar, which should help Japanese exporters.

"The positive impact of a weaker yen should outweigh the disappointment about the US's economic outlook and the lack of more powerful stimulus," said Masayuki Doshida, senior market analyst at Rakuten Securities. "But there won't be a sustained rally on the back of this."

Growth worries

The Fed also slashed its forecast for US economic growth, hitting commodities sensitive to expectations for industrial demand.

Data in recent weeks has painted a picture of a faltering recovery in the United States, while Europe's debt crisis has been worsening remorselessly and even China, the chief motor of global growth in recent years, is slowing down.

Copper fell 1.2% to below $7 460 a tonne and oil also lost ground. US crude dropped 1.3% to $80.37 a barrel and Brent crude fell 0.7% to its lowest in 18 months, just above $92 a barrel.

"The US economy is not in good shape," said Ken Hasegawa, a commodity sales manager at Newedge Japan.

"You add Europe and poor demand-supply situation, and the picture gets much worse. I can't see any support for crude prices now, it's all very bearish."

The Australian dollar, sensitive to demand for Australia's natural resources, particularly from top customer China, was down around 0.3% at about $1.0160.

QE3 seen down the line

A Reuters poll showed Wall Street's top bond firms still see a 50% chance of a third bout of quantitative easing or "QE3", under which the Fed effectively creates money to fund large asset purchases, to stimulate the economy.

The liquidity boost delivered by such a move would be likely to increase money flows into riskier assets such as equities and commodities, while the monetary easing might also be expected to weaken the dollar.

"Clearly, the tilt is to do more. QE3 is one of those options," said Julia Coronado, chief economist North America at BNP Paribas in New York.

Underlining the fragile state of global growth, the International Monetary Fund, in an umbrella report for the G20, warned of significant risks to the world economy from the European debt crisis and excessive fiscal tightening in some rich nations, urging collective action to lower unemployment.

The decision to hold off on QE3 supported the dollar against the euro and the yen, and also hit gold, which had been rising as investors betting on QE3 had bought the precious metal as a hedge against currency depreciation.

The euro was down 0.3% at around $1.2670 on Thursday, while gold fell 0.3% to just above $1 600 an ounce.