Fed Signals Rattle World Markets

But China’s central bank offered some comfort to stressed money markets, relieving Thursday’s crushing liquidity squeeze with “window guidance” to major state banks to resume supplying funds, after indicative interbank rates reached highs above 25 percent on Thursday.

The benchmark weighted-average seven-day bond repurchase rate tumbled 351 basis points to 8.12 percent, and the overnight repo rate fell 378 bps to 7.96 percent.

The two short-term rates hit record highs on Thursday as the central bank again ignored market pressure to inject funds into the market, a move traders and analysts see as an attempt to force banks and other financial institutions to trim non-essential businesses.

Spot gold rebounded with an 0.8 percent rise to $1,287.49 an ounce after touching its lowest since September 2010 of $1,268.89 earlier, after falling more than 5 percent overnight in one of bullion’s biggest routs since the 2008 financial crisis.

MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.8 percent, after dipping more than 1 percent earlier to its lowest since September. The index closed Thursday down 3.87 percent for its biggest daily percentage fall since November 2011.

Australian shares trimmed earlier losses to fall 0.3 percent while South Korean shares also curbed some losses after skidding 2.4 percent to their lowest in 11 months. Hong Kong and Shanghai shares fell 1.2 percent and 0.8 percent respectively.

Japan’s benchmark Nikkei stock average, which earlier fell more than 2 percent to a one-week low, was last down 0.9 percent.

“Clearly, the Fed tapering is on the table now. There is a reversal of perception in liquidity and it will take some time for investors to digest, rebalance and what not,” said Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank International in Hong Kong.

He added, however, that over the longer term financial markets will regain stability starting with the U.S. bond market as the real motivation behind the Fed’s slowing down of stimulus is an improving U.S. budget deficit.

“There are massive buying opportunities coming out of this,” he said.

U.S. Treasuries stabilised in Asia, with the benchmark 10-year yield little changed from late New York levels of 2.42 percent 2.471 percent on Thursday its highest since August 2011 of when Wall Street shed about 2.5 percent and European shares saw their steepest one-day decline in 19 months.

The CBOE Volatility Index, which gauges expected volatility in Wall Street, spiked 23.1 percent to 20.49 on Thursday, its highest close so far this year.

The Australian dollar, often seen as a gauge for risk appetite, also recovered to trade at $0.9235, after taking a harsh beating overnight to touch its lowest in nearly three years of $0.9163. The resource-reliant Aussie was also weighed by a weak Chinese manufacturing activity.

The dollar was likely to remain supported by the prospect of the Fed tapering based on an improving economy, with data on Thursday showing U.S. home resales hit a 3-1/2-year high in May and factory activity in the Mid-Atlantic region rebounded this month.

The dollar was down 0.2 percent against the yen at 97.05, moving away from its 10-week low of 93.75 yen hit last week.

Emerging market currencies were expected to remain pressured by the changing emphasis of the Fed’s stimulus plan.

“The combination of rising asset volatility and a steepening U.S. yield curve will likely weigh on currencies reliant on capital imports,” Morgan Stanley said in a research note.

“Commodity and emerging markets countries with current account deficits and large foreign funding liabilities should see significant pressure, as global rebalancing slows demand for raw materials.”

The Indian rupee slumped to a record low of 59.9850 on Thursday as the country’s record high current account deficit deepened its vulnerability, with the Fed’s signalling a looming end to the cheap money that has funded India’s current account deficit.

U.S. crude futures reversed earlier losses to inch up 0.1 percent to $95.24 a barrel while Brent rose 0.3 percent to $102.45.

(Additional reporting by Jungyoun Park in Seoul; Editing by Eric Meijer)

Article source: http://www.nytimes.com/reuters/2013/06/20/business/20reuters-markets-global.html?partner=rss&emc=rss