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Japanese stocks dived into bear market territory and Asian shares hit new 2013 lows on Thursday as the prospect of reduced stimulus from central banks rattled investors, triggering a broad sell-off from riskier assets.
The tumult in global markets also sent the dollar skidding as uncertainty about whether the Federal Reserve would scale back its massive stimulus and the slide in Japanese shares forced a clean-out of long-dollar positions.
MSCI's broadest index of Asia-Pacific shares outside Japan tumbled 1.9% to its lowest since November for its biggest daily drop in three weeks when global financial markets were rattled by comments from Fed Chairman Ben Bernanke suggesting the US central bank could tone down its bond-buying stimulus plan if the economy continued to improve.
Around the same time the Bank of Japan also held off from taking fresh measures after a bold reflationary scheme on April 4, a stance repeated at its meeting last week when the bank decided against fresh steps to quell heightened volatility in domestic bonds that has threatened to undercut its ultra-easy monetary policy.
As a result, investors have been unwinding short-yen and long-Nikkei positions.
The position adjustments were exacerbated as some hedge funds sold assets for cash ahead of their half-year book closing, some traders said.
"It's a combination of Bernanke and the BOJ that triggered this turmoil, magnifying the moves of positions that needed to be sorted out," said Tetsuro Ii, chief executive of Commons Asset Management.
"The BOJ disappointed those who had high hopes for the great portfolio rebalancing by Japanese institutional investors, and are now rushing to close such bets. I think the Nikkei is close to completing such adjustments but currencies may take a bit more time given the markets' size."
The dollar index, measured against a basket of six major currencies, was down 0.27% to its lowest since February 20.
The dollar slid 1.3% to 94.82 after earlier touching a 10-week low of 94.30, wiping all gains made on April 4 when the BOJ unveiled its bold bond-buying scheme aimed at reflating the economy, encouraging speculators to bet on a weakening yen. The dollar is now down more than 8% from a 4-1/2-year peak of 103.74 yen scaled last month.
Japan's Nikkei stock average dived 6%, extending a selloff that began on May 23 on worries over slowing growth in China and the Fed's policy outlook. The Nikkei scaled a 5-1/2-year high last month.
"Investors are becoming risk averse on global assets," said Yasuo Sakuma, portfolio manager at Bayview Asset Management, adding that such weak sentiment may last as long as there are concerns about the Fed scaling back its stimulus measures.
LESS LIQUIDITY SUPPORT?
The Fed's aggressive quantitative easing in the form of massive bond-buying has been the main driver of risk asset rallies, so the prospect of a reduction has raises fears about funds being withdrawn from markets and potentially triggering a collapse in prices, especially where they are seen at overbought levels.
The Philippines stock market maybe symbolic of the current risk aversion: the market touched its lifetime high last month but has quickly trimmed its gains to just 10 % so far this year from more than 20%.
"Foreign investors are rushing out the door to secure whatever gains they still have," said April Lee-Tan, research head at COL Financial in Manila.
Some analysts also noted a sharp sell-off in Singapore government bonds triggered by offshore investors, sending the 10-year yield up by nearly 90 basis points in less than one month.
Australian shares earlier fell 1% to a fresh 5-1/2-month low while South Korean shares slipped 1.1%. Chinese markets slumped on weak May economic data, after reopening from a Monday to Wednesday holiday, while Hong Kong also resumed trading on Wednesday after a break.
Shanghai shares slid as much as 3.8% to their lowest since December while Hong Kong shares shed as much as 3.3% to their lowest since September.
Japanese government bonds soared with the benchmark 10-year yield dropping below 0.8% for the first time in nearly a month, as stocks plunged with a resurgent yen.
"Market volatility is expected to stay elevated until the Fed's policy meeting next week, at which we may see with more clarity into the tapering issue," said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo. "If volatility in stocks subsides, currencies will return to trading on fundamentals."
The Fed's next policy meeting will be held next week, on June 18-19.
The Bank of Korea held interest rates steady on Thursday, possibly matching the analysts' consensus view that the cut in May was the last one for the year because South Korea is on a track to recovery.
US crude futures were down 0.5% at $95.36 a barrel and Brent fell 0.4% to $103.11.
