By Hideyuki Sano
TOKYO (Reuters) – Asian shares retreated and oil prices resumed their descent on Tuesday as investors took profits on rebounds over the last two days as fears of a global economic slowdown showed no sign of abating.
Japan’s Nikkei fell 1.8 percent by midday while Hong Kong’s Hang Seng Index fell 1.5 percent. Both fell more than 2 percent at one point.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.9 percent after two days of gains since late last week.
“Wherever you look – China, oil and the U.S., there is no clear evidence of improvement in economic fundamentals. So in the near term, it is hard to expect risk asset prices to gain further after a spate of short-covering,” said Tatsushi Maeno, managing director at PineBridge Investments.
Crude oil prices have failed to extend their rebound that had started last week, falling around 7 percent so far this week. News that Iraq’s output reached a record last month deepened concerns of oversupply.
Oil prices have fallen more than 75 percent from their 2012 peaks as global output was boosted by U.S. shale oil production and demand growth turned tepid, partially caused by the Chinese economy’s slowing growth.
The massive price fall is putting huge pressure on profitability of energy firms worldwide, which are in turn slashing investment and cutting jobs.
The U.S. S&P fell 1.6 percent to 1,877.08, led by a 4.5 percent drop in the energy sector.
Brent crude futures, the global benchmark, dropped to $ 30 a barrel, falling 1.3 percent in Tuesday Asian trade, or 6.5 percent so far this week.
U.S. crude futures fell even more to $ 29.83 per barrel, down 7.4 percent from late last week.
Countering selling pressure for now are vague hopes that the U.S. Federal Reserve may tone done its bias towards further policy tightening and that the Bank of Japan may expand its stimulus. Both will hold policy reviews this week.
The U.S. Federal Reserve’s policy statement is due on Wednesday followed by the Bank of Japan’s announcement on Friday.
Fed officials have so far stuck to the line that the bank would be ready to raise interest rates four times this year despite market volatility as the U.S. economic expansion continues.
Investors have difficulty believing such a policy tightening is possible under the current unstable economic and market conditions, with federal fund rate futures pricing in just over one rate hike this year.
Some investors hope a more dovish tone out of the Fed would help to soothe market sentiment, given that the perception gap between markets and policymakers has been a major source of anxiety.
Speculation that the Bank of Japan could step up its stimulus this week is also rising, although many market players still think the BOJ will hold fire for now.
The rebound in oil and risk assets late last week was indeed spurred by comments from European Central Bank President Mario Draghi indicating another stimulus in March.
“The fall in markets is stemming from worries about China, oil and so on. And now people think policy makers will try to stop that with monetary easing,” said Koichi Yoshikawa, executive director of finance at Standard Chartered Bank.
“The problem is that monetary easing has succeeded in supporting financial market but not necessarily the real economy,” he added.
In the currencies, resurgent risk aversion helped to lift the yen to 118.18 to the dollar from its two-week low of 118.88 hit on Friday.
The euro also gained against the dollar to $ 1.0845, 0.5 percent above late last week and having recovered about half the losses seen on Thursday when European Central Bank President Mario Draghi indicated more stimulus in March.
(Reporting by Hideyuki Sano; Editing by Eric Meijer and Kim Coghill)
