Hong Kong: Asian stocks slid for a second day on Wednesday while the US dollar climbed, with investors fleeing to the sidelines to await companies’ business outlooks as what is expected to be a grim results season begins.
Shares of banks, automakers and technology companies were the main targets of selling, after they led a sharp rally in the last month on the back of budding optimism that policymaker stimulus efforts would eventually filter down to the global economy.
Those hopes are being tempered by the brute reality that earnings for the US S&P 500 companies are expected to tumble 37% in the first quarter, the seventh consecutive declining quarter, according to Thomson Reuters.
Some Asian companies were expected to fare better this year than many of their counterparts in other regions. For example, US earnings this year were forecast to shrink 4% versus 1% in Hong Kong and 10% growth in South Korea, according to global estimates tracker IBES.
Still, the overarching trend of downward earnings revisions was still firmly in place.
“I think round one of the rally may be over,” said Katsuhiko Kodama, a senior strategist at Toyo Securities in Japan.
Japan’s Nikkei share average fell 2%, led by Canon Inc and top bank Mitsubishi UFJ Financial Group The index on Tuesday closed roughly 25% above its 10 March bear market low.
The MSCI index of Asia Pacific shares outside Japan was down 2%, having been repelled by a major obstacle on technical charts for the third time on Monday.
A 4% drop in shares of global lender HSBC was the biggest drag on Hong Kong’s Hang Seng index, which led the region with a 2.2% decline on the day.
S&P 500 futures were down 1.1%, pointing to a lower open, after aluminium producer Alcoa Inc kicked off the US earnings season by posting a second straight quarterly decline.
Volatility under control
Despite the shakeout in bullish positions in equities, global financial markets appeared to be at an inflection point, with volatility remaining contained and the pace of economic decline appearing to slow across the region.
The Chicago Board Options Exchange’s volatility index, or VIX , closed below its 200-day moving average for a third day. The 20-day moving average of the VIX was on the verge of dropping below the 200-day, signalling a shift to a downtrend.
For now investors have sought cover in the U.S. dollar and yen until some corporate earnings visibility returns.
The euro fell 0.4% to $1.3215 and dipped 0.3% to ¥132.98 after touching ¥137.42 on Monday, its highest since late October.
The dollar rose 0.2% to ¥100.66 after rising to a nearly six-month high of ¥101.45 on Monday.
“The currency market moved back to risk aversion after optimism had gone a bit too far,” said Yoshihisa Kanzaki, a currency dealer at Shinkin Central Bank.
US light crude fell about a dollar or 2% toward $48 a barrel on Wednesday adding to Tuesday’s 3.7% loss after weekly data showed US crude inventories up far more than expected and declining equities dented sentiment.
Falling stocks pushed up Japanese government bond futures but caution before a five-year auction later in the day capped gains. The June 10-year futures contract was up 0.07 point.
Australian bonds resumed their downtrend, unwinding bets on a steepening yield curve, after the Reserve Bank of Australia cut rates to a record low on Tuesday. Some investors believe that the end of the easing cycle is approaching.
US Treasuries extended gains from overnight as investors sought a short-term refuge. The yield on the benchmark 10-year yield dipped to 2.88% from 2.90% on Tuesday in New York.