Asia stocks slip anew, can't escape Fed fears

Aug 21 2013, 09:51 IST
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Korean shares shed 1 percent KS11 while the Shanghai market lost 0.4 percent SSEC. (Reuters Korean shares shed 1 percent KS11 while the Shanghai market lost 0.4 percent SSEC. (Reuters
SummaryVolatility will benefit countries with better balance sheets and low currency vulnerability.

Asian share markets came under renewed pressure on Wednesday as investors worried that minutes of the Federal Reserve's July policy meeting would only add to suspicions it will start scaling back stimulus from September.

Reports that Japan's government would raise the severity of the latest leak at Fukushima to a level 3 event, or a serious radiation incident, sent shivers through stocks and knocked the Nikkei .N225 down 0.8 percent.

The news drowned out strong words from Bank of Japan Governor Haruhiko Kuroda that he would not hesitate to expand the bank's already massive asset buying campaign if the economic outlook darkened.

The selling rippled across the region, nudging MSCI's index of Asia-Pacific shares outside Japan .MIAPJ0000PUS down 0.5 percent to a five-week trough. Korean shares shed 1 percent KS11 while the Shanghai market lost 0.4 percent .SSEC.

It also fuelled safe-haven demand for the yen, particularly against the Australian dollar which is being sold by investors as a hedge against further weakness across Asia.

Emerging markets from India to Brazil have been hard hit by the prospect of Fed tapering, which has raised U.S. borrowing costs and throttled the supply of cheap dollars formerly used to support domestic demand and fund current account deficits.

While benchmark 10-year Treasury yields edged back to 2.81 percent on Wednesday, analysts are worried the Fed minutes could jolt them higher again.

"The minutes should continue to reinforce this theme of tapering at the September meeting as long as the labor market holds up," said Michelle Girard chief U.S. economist at RBS.

"Along with that theme, they should also repeat another tune dear to FOMC hearts, 'tapering is not tightening.'"

Markets, however, have listened more to the former than the latter. Indeed, there is a chance the Fed will try to reassure markets that an actual tightening in policy is still far distant, perhaps by lowering the level at which unemployment would warrant consideration of a rate rise.

Unfortunately the Fed itself is divided on all this and the minutes of its last meeting are likely to show many competing voices, perhaps leaving the market as confused as ever.


Still, investors are convinced that the Fed will have to start tapering at some point and that has made it much harder for emerging market countries to attract foreign funds.

"Weakness in several key high-yielding emerging markets is overflowing to the rest," noted analysts at Barclays. "Higher volatility will benefit countries with better

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