By Wayne Cole
SYDNEY (Reuters) – Asian markets took a spill on Thursday after minutes from the Federal Reserve’s July policy meeting showed it was still on track to start tapering stimulus as early as next month, sending Treasury yields to two-year highs.
Wall Street stocks sold off, the U.S. dollar surged, and borrowing costs rose globally. All of which is bad news for emerging markets that have come to rely on cheap dollars to underpin domestic demand and fund current account shortfalls.
In early trading MSCI’s index of Asia-Pacific shares outside Japan <.miapj0000pus> shed 0.9 percent to a six-week trough. Korean shares were down 1 percent (.KS11) for a second straight session, while Japan’s Nikkei (NIK:^9452) fell 1.1 percent.
The contagion spread to Australia, where the main share index dropped 1.3 percent (.AXJO) and its dollar skidded to $0.8940 having lost a full cent since the Fed news.
The Australian currency is often used as a proxy against emerging market risk in Asia, so its decline was not a good omen.
One bright spot amid the gloom was a Reuters poll showing Japanese manufacturers’ optimism improved to the highest level in three years, as a weak yen boosted earnings for exporters of textiles, chemicals, steel and other metals.
Investors face an added hurdle in HSBC’s China Flash PMI for August due later on Thursday. A weak reading would give markets another excuse to push currencies and shares lower.
Dealers said the violence of the market reaction to the Fed minutes was partly because some investors had hoped the central bank would lean against the recent climb in Treasury yields. Instead it seemed most Fed members felt the outlook for tapering had not changed, at least at that time.
“That does not smack of a Fed going out of its way to fight the back-up in bond yields at the time, which is partly why Treasuries have sold off,” said Alan Ruskin, global head of foreign exchange strategy at Deutsche Bank in New York.
“Most other asset markets are taking their lead from Treasuries, and the minutes provide no obvious relief for the stresses in the emerging market world.”
Markets from India to Indonesia have already been under intense stress from expectations Western investors will repatriate funds now that yields at home are rising.
A confused policy response by some governments has only added to the sense of foreboding and sent funds fleeing the region.
Traders expected currencies and stocks in India, Indonesia and Thailand would be under particular pressure on Thursday, likely requiring more official action to support assets.
Doing the most damage was a jump in 10-year U.S. Treasury yields to almost 2.9 percent, a level last seen in July 2011. This is a major chart level and a break could see the market quickly test 3 percent, which itself is a huge psychological marker.
Treasury yields tend to set the benchmark for borrowing costs across the globe, so the rise will make it more difficult for indebted countries and companies to pay their bills.
The prospect of higher returns gave the U.S. dollar a lift across the board. The euro was back at $1.3340, from a high of $1.3452 on Wednesday.
The dollar index, which measures the greenback versus a basket of six currencies, rose to 81.422 (.DXY), from a low of 80.896. The dollar’s gains on the yen were more restrained at 97.75, in part because dealers expected the Japanese currency would get a lift from safe-haven flows.
Commodity prices were generally lower. Gold backtracked almost $8to $1,357.64 an ounce. Brent crude oil fell 25 cents to $109.56, in part on reports some Libyan oil exports might soon resume. U.S. October oil fell 22 cents to $103.64 a barrel.
(Editing by Eric Meijer)