Asian shares flatline, fear more US Fed confusion

 

 Asian markets face a tense few days waiting to see if minutes of the Federal Reserve's last policy meeting will provide some clarity on when it might start scaling back stimulus -- with far-reaching implications for borrowing costs across the globe.

 

Asian shares and currencies were expected to remain choppy, with Indian markets under particular pressure after the rupee cratered to record lows despite government efforts to stem the tide.

 

Yields on 10-year Treasury debt were up near two-year highs at 2.85% on Monday on talk the Fed will start tapering next month, and analysts suspect the minutes may not resolve the issue.

 

"The Fed has made every effort to prepare the market for tapering come the fall and the minutes should continue to suggest just that," said Michael Cloherty, head of US rates strategy at RBC Capital Markets.

 

"What the minutes are unlikely to include, however, is any clear indication of the exact timing." That would depend on the economic data fares up to the September 17-18 meeting.

 

MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.1% in early trade. It had ended last week with gains of 1.45%, though that merely recovered ground lost during the previous two weeks.

 

Tokyo's Nikkei share average inched up 0.2% in early trade on Monday after ending last week flat. Japanese data showed the third-largest trade deficit on record as imports outpaced exports.

 

Australia's S&P/ASX 200 index was barely changed, while Korean shares eased 0.3%.

 

The Philippines suspended trading in the stock, foreign currency and debt markets on Monday due to heavy rains and flooding in some parts of Manila.

 

Emerging currencies continued to struggle after India's rupee touched a record low beyond 62 per dollar, bringing its year-to-date losses to 11%. The Indonesian rupiah also tumbled to a four-year trough.

 

The Reserve Bank of India has tried to restrict how much Indian residents and companies can invest abroad, but that only raised fears of outright capital controls that would further undermine the confidence of foreign investors.

 

Crucial later in the week will be an early reading on Chinese manufacturing from HSBC. Recent data suggested the economy might be stabilising and any improvement in the purchasing manager index will be welcomed by Asian investors.

 

CURRENCIES CONTAINED

 

The US dollar was a shade firmer on Monday at $1.3324 per euro, against $1.3332 late in New York on Friday. Against the yen it nudged up to 97.70, while the dollar index added 0.1% to 81.340.

 

The dollar has been in gradual decline for the past six weeks so, in part on concerns the prospect of Fed tapering would scare foreign investors out of US bonds.

 

Figures out last week showed China and Japan -- the two largest foreign holders of US debt -- were at the forefront of a $66 billion exodus from long-term US Treasuries in June, dumping a net $40 billion.

 

Still, at some point yields should reach levels that are attractive to investors once more.

 

"We continue to believe that tapering will begin at the September meeting and, hence, support the USD, especially against high-yielding currencies," analysts at Barclays said in a note.

 

They added, however, there was a chance the Fed may have begun discussing lowering its threshold rate for unemployment as a way to convince investors that rates will remain near zero for a long time to come.

 

"Any discussion in this regard is likely to be viewed as a dovish surprise by the market and lead to a near-term rally in the belly of the Treasury curve," said Barclays. The dollar would also be vulnerable in such an event.

 

The Dow Jones industrial average dipped on Friday to end the week 2.2% lower. The Standard & Poor's 500 Index followed to shed 2.1% for the week.

 

Europe's broad FTSE Eurofirst 300 index fared better to end last week a fraction firmer. Euro zone bond markets also outperformed their US cousins, thanks in part to expectations the European Central Bank will keep policy super-loose for some time to come despite hints of economic recovery.

 

Hopes for a pick-up in growth globally has also supported commodities recently, with copper reaching a 10-week peak of $7,420 a tonne on Friday.

 

Gold and platinum have gained as well, though they could be threatened if the Fed does wind down its stimulus. Gold was firm at $1,375.85 an ounce having made a two-month high of $1,379.81. Platinum and palladium were also at two-month highs.

 

Oil futures were just a shade softer on Monday having boasted their the biggest weekly percentage gain in six weeks as turmoil in Egypt and Libya stoked worries about supply.

 

Brent crude futures for October were off 10 cents at $110.30 a barrel. US oil for September eased 12 cents to $107.34.