Asian shares rise but Japan down on tax reports

Markets begin to entertain prospect of near term US rate hike

Asian shares rose on Monday after a solid session on Wall Street, while the dollar moved away from recent highs.

Financial spreadbetter IG expected Britain’s FTSE 100 would open 0.1 per cent higher and Germany’s DAX 0.2 per cent.

MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.6 per cent, after US shares rallied on Friday, shrugging off growing expectations of further tightening in monetary policy.

But Japan's Nikkei stock index ended down 0.5 per cent on worrying economic data and reports that Japan's sales tax increase would be implemented after all, quashing hopes of a delay.


Japanese finance minister Taro Aso told US treasury cecretary Jack Lew on Saturday that Japan will raise the sales tax as planned.

"The market was convinced 100 per cent that a tax hike will be delayed," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

Adding to concerns about the tax, data released before the open showed Japan’s exports tumbled 10.1 per cent in April from a year earlier, in line with expectations but down for a seventh straight month, reflecting sluggish demand from China and emerging markets. Imports fell sharply, which in turn boosted the country’s trade surplus above expectations.

The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index showed Japanese manufacturing activity contracted at the fastest pace in more than three years in May as new orders slumped.

Investors expect the Bank of Japan to muster further stimulus steps, perhaps as early as this summer.

By contrast, markets have started to entertain the prospect of a near term US rate hike after last week’s release of Fed meeting minutes showed that policymakers weren’t shying away from raising interest rates as early as next month.

The probability for a June rate hike rose from around 4 per cent at the start of the week to 30 per cent on Friday, according to CME Group’s FedWatch site. Futures markets are predicting two rate increases this year as opposed to just one as recently as last week.

Federal Reserve Chair Janet Yellen will appear at a panel event hosted by Harvard University on Friday. Fed branch presidents including those from San Francisco, St Louis, Dallas, Minneapolis are also slated to speak earlier in the week.

“Fed futures price a full hike through December now, but the risk premium out the curve in the two year to five year sector is still low,” wrote Andrew Sheets, chief cross-asset strategist at Morgan Stanley.

“Yellen’s two speeches on May 27th and June 6th ahead of the June FOMC become critical in shaping that risk premium. A reiteration of the hawkish minutes will likely lead to front-end steepening and push the dollar higher,” he said.

On the US data front, home resales rose more than expected in April, suggesting the economy continues to gather pace during the second quarter.

The dollar index, which tracks the greenback against a basket of six rival currencies, edged down 0.2 per cent to 95.190 after gaining 0.8 per cent last week. It stood within sight of Thursday’s high of 95.520, its strongest since March 29th.

The euro was nearly flat at $1.1229, not far above its Thursday low of $1.1180, its weakest since March 29th.

The yen gained as Japanese equities slipped. The dollar was down 0.4 per cent at 109.77 yen, but was still not far from its three-week peak of 110.59 yen scaled on Friday.

Against this backdrop, the United States issued a fresh warning to Japan against intervening in currency markets at the weekend Group of 7 financial leaders’ meeting in Japan.

Crude oil futures dropped as investors locked in profits after they logged a second week of gains, despite posting losses for the day on Friday.

US crude fell 1.1 per cent to $47.90 a barrel, while Brent shed 0.9 per cent to $48.27.

Spot gold edged down 0.1 per cent to $1,250.60 per ounce after declining for three days in a row and notching nearly three-week lows. Gold skidded 1.7 per cent last week, marking its biggest weekly decline in two months.