Hong Kong: Asian stocks edged up while the yen rose to a 15-year high on Tuesday ahead of a decisive vote in Japan, leaving unclear whether a rally that lifted global equities to the highest in four months can stay alive.
The yen has for the past few years been a gauge of investors’ distaste for risk-taking, rising when the need for stability is high.
Investors though have had mixed signals in September about whether it is the right time to shift out of havens and buy back riskier, higher-yielding assets.
Resilient economic growth out of China and relief that new banking regulations will not unleash a rush to raise equity have gently turned the attention of investors away from uncertainty about the US recovery.
August US retail sales due later could be a reminder though of how much the economy is slowing.
“Although better data in the US and China and the agreement in Basel on new regulations have boosted risk appetite, the moves are already beginning to look exhausted,” Mitul Kotecha, global head of foreign exchange strategy at Credit Agricole CIB, said in a note.
“It would be easy to jump on the bandwagon, but after the sharp gains registered over recent days we would suggest taking a cautious stance about jumping into risk trades at current levels.”
Japan’s ruling party was holding a leadership election on Tuesday that will determine who is Japan’s prime minister and could have a big impact on how Tokyo deals with persistent yen strength and deflation.
The US dollar was down 0.4% to 83.34 yen after earlier falling as low as 83.23 yen in busy trade.
Too close to call
The race between Prime Minister Naoto Kan and party heavyweight Ichiro Ozawa was too close to call, Japanese media surveys showed, ahead of a party conference due to start at 0500 GMT. Analysts generally agree an Ozawa victory could cause the yen to weaken, since he is more open to government intervention to stop the currency’s 11% climb this year.
The US dollar index, a measure against six other major currencies, fell 0.2% to a one-month low after weakening by the most in two months on Monday, as dealers scooped up yen and Swiss francs.
Japan’s Nikkei share average led Asia’s declining markets, falling 0.2%. The strong yen has been a lead weight on Japanese stocks, causing them to underperform other advanced markets.
“While opinion polls have favoured Kan, the stock market overwhelmingly would want to see Ozawa win because he is seen to be a more aggressive leader, including his view on currencies,” said Kenichi Hirano, operating officer at Tachibana Securities in Tokyo.
The Nikkei has not risen above its 200-day moving average since early May. The US S&P 500 index on the other hand has breached the key long-term indicator three times since May, including overnight. A third failure to stay above the 200-day moving average could trigger a bout of profit-taking.
The MSCI index of Asia Pacific stocks outside Japan was up 0.3%, having fallen for only two days so far in September. The raw materials sector provided the biggest lift, while sectors associated with safety from volatility underperformed, a hopeful sign for equity bulls.
The index is trading at 11.7 times expected earnings a year from now, still way below the five-year average of 13.2 times, suggesting there are still more bargains out there, Thomson Reuters I/B/E/S data showed.
The all-country world stocks index rose for a fifth day to the highest since 5 May.
While equity market traders tried to keep a rally going, bond markets could hold a clue on investor sentiment on risk taking.
A precipitous decline in the yield of the 10-year US Treasury note since April paused in September, while investors reloaded on cheap equities and higher-yielding credit. The resumption of declining US yields could be an additional weight on the dollar and a sign of interest in risk taking.
The US 10-year yield was at 2.74%, roughly unchanged from where it was late Monday in New York.
Japanese 10-year government bond yields edged up 2 basis points on the day to 1.17%, giving way to equity strength.
Oil was steady near a one-month high with the shutdown of the biggest Canada-US pipeline entering a fifth day. US crude for October was trading at $77.25, having earlier touched an intra-day peak at 78.04, the highest since 11 August.