China property sector worries dent Asian shares; Fed in focus

SINGAPORE: Asian stocks stumbled on Tuesday as the court-ordered liquidation of property giant China Evergrande weighed on sentiment while geopolitical tensions lifted oil prices and dented risk appetite ahead of the Federal Reserve’s meeting

U.S. Treasury yields remained under pressure in Asian hours, keeping a lid on dollar movement, after the Treasury Department said it would need to borrow less than its previous estimates.

Uncertainty around how the court order to liquidate Evergrande Group will play out and its impact on the nation’s fragile property market is keeping investors on edge.

Hong Kong’s Hang Seng index shed 1.7%, with the mainland properties index down 3%. China stocks fell 0.69% and were on course for a near 4% drop for the month.

China’s 10-year government bond yield dropped to the lowest in more than two decades as investors still expect more policy easing to defend equity markets after Beijing announced a cut to bank reserves last week.

“The latest development is a reminder of the risks of investing in the Chinese real estate sector and the challenges that the sector faces on the road to recovery,” said Vasu Menon, managing director of investment strategy at OCBC Bank in Singapore.

China and Hong Kong stocks dragged MSCI’s broadest index of Asia-Pacific shares outside Japan down 0.4%. Japan’s Nikkei was up 0.11%, set for a nearly 8% gain for the month.

European bourses though are expected to shrug off the weak sentiment seen in Asia and open much higher, with Eurostoxx 50 futures up 0.43%, German DAX futures 0.40% higher and FTSE futures up 0.54%.

Overnight, the S&P 500 notched yet another record high close, as market participants looked ahead to this week’s slew of megacap earnings, including results from Microsoft and Alphabet later on Tuesday.

While the Federal Reserve’s policy meeting and Chair Jerome Powell’s commentary will likely be the main event of the week, investors will also watch out for European inflation data, Bank of England policy meetings and the U.S. employment report this week to help gauge the direction markets will take in the months to come.

“The Fed is expected to signal that though interest rates may have reached their peak, the central bank is not in a hurry to reduce them,” said Gary Dugan, CIO at Dalma Capital. “A resurgence in economic growth could further strain the already tight labour market, potentially driving wages up.”

The Fed in December surprised market with its dovish tilt, projecting 75 basis points of interest rate cuts in 2024, sparking an blistering year-end risk rally, with traders pricing in easing as early as March.

But since then, a slate of strong economic data, sticky inflation and pushback from central bankers have led markets to significantly dial back their expectations.

Markets now expect 47% chance of a Fed rate cut in March, the CME FedWatch tool showed, down from 88% a month earlier. They currently anticipate 134 bps of cuts in the year, compared with 160 bps of easing a month earlier.

In the currency market, the dollar index, which measures the U.S. currency against six rivals, was steady at 103.51. The yield on 10-year Treasury notes extended its slide and was down 4 basis points to 4.051%.

The euro last bought $1.0823, near a seven-week low of $1.07955 it touched on Monday as traders adjust their expectations of when the European Central Bank will start cutting interest rates.

Investor jitters on rising tensions in Middle East has kept risk sentiment in check and fuelled supply concerns in the oil markets.

The United States vowed to take “all necessary actions” to defend American forces after a drone attack killed three U.S. troops in Jordan.

U.S. crude rose 0.6% to $77.24 per barrel and Brent was at $82.78, up 0.46% on the day. – Reuters