Asia Stocks Slide on Central Bank Angst After U.S. Market Slumps

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  • Expect further downside, says Peak Asset Management’s Dagan
  • Goldman Sachs analysts upgrade MSCI China Index stance

Asian stocks headed for the biggest drop since June, following a rout in U.S. shares, as policy officials at central banks signaled a reluctance to extend stimulus. Samsung Electronics Co. tumbled amid warnings to stop using its Note 7 smartphones.

The MSCI Asia Pacific Index dropped 2.1 percent to 137.38 as of 5:06 p.m. in Tokyo as benchmarks in Australia, Hong Kong and New Zealand all sank more than 2 percent. The losses follow a 2.4 percent tumble on the S&P 500 Index on Friday as volatility surged after Federal Reserve Bank of Boston President Eric Rosengren said the economy could overheat if they waited too long to raise interest rates, spurring bets on a hike by the end of the year. Equity markets in Singapore, Indonesia, the Philippines and Malaysia are among those closed for holidays Monday.

All eyes now turn to Fed Governor Lael Brainard who speaks Monday in Chicago in what will be the final appearance by a Fed official before its policy meeting next week. Rosengren’s comments propelled the probability of a rate increase by December to 60 percent, coming a day after European Central Bank chief Mario Draghi surprised markets by playing down the prospect of further stimulus.

“Central banks are reluctant to add additional stimulus and that’s causing a lot of concern,” Niv Dagan, executive director at Peak Asset Management LLC, told Bloomberg Radio. “We expect additional downside in the near term. You want to wait and see and remain cautious,” he said.

Hong Kong’s Hang Seng Index slumped 3.4 percent, while the Hang Seng China Enterprises Index of mainland firms listed in the city lost 4 percent. Japan’s Topix index fell 1.5 percent. Australia’s S&P/ASX 200 Index lost 2.2 percent and South Korea’s Kospi index declined 2.1 percent. New Zealand’s S&P/NZX 50 Index slid 2.5 percent, the most in five years after reaching a record high last week. Taiwan’s Taiex Index slid 1.2 percent.

The abrupt selloff and surging volatility is testing investors’ nerves following an extended period of relative calm before Friday. The CBOE Volatility Index, a measure of price turbulence known as the VIX, soared 40 percent on Friday, the most since the Brexit vote. That took the measure above its average level during 2016. Before Friday, the S&P 500 had traded within a range of less than two percentage points for 40 days.

The Nikkei Stock Average Volatility Index, a gauge of expectations for price swings on the Japanese benchmark equity measure, soared 18 percent, the most in three months. The HSI Volatility Index, which measure anticipated volatility on the Hang Seng Index, climbed 22 percent. The KOSPI 200 Volatility Index surged 42 percent.

The selling isn’t limited to stocks, as the central-bank hawkishness sent Treasuries tumbling to the lowest since June. That’s testing stocks that serve as bond proxies, such as high-dividend paying Australian banks.

“What has changed is the market’s comfort with the assumption that central banks will be providing sufficient liquidity support for a rally,” said Ken Peng, an Asian investment strategist at Citi Private Bank in Hong Kong. “Eventually, that assumption will be true, but probably at a much lower price point, when it’s meaningful enough for central banks to be active again.”

Bulls were quick to note there may be a silver lining as the Fed gears up to lift interest rates for the first time since December. Fed Chair Janet Yellen last month said the case for an increase in the federal funds rate had strengthened in recent months.

“If rates are going up it’s because the U.S. economy is getting better,” Joshua Crabb, Hong Kong-based head of Asian equities at Old Mutual Plc, told Bloomberg TV. “That’s not a bad thing for equities.”

Goldman Sachs Group Inc. advised buying Chinese companies trading in Hong Kong. Analysts led by Kinger Lau and Timothy Moe raised its stance on the MSCI China Index, citing a likely increase in investment boosted by renewed policy easing and a stabilization of corporate earnings growth.

Samsung Electronics Co. tumbled 7 percent in Seoul, the most since 2012, after U.S. regulators and the company itself warned users of its Note 7 smartphones to immediately turn off and stop charging them.

The cautions were issued by the U.S. Consumer Product Safety Commission and Samsung, which are also in talks on an official recall of the devices as soon as possible. Aviation authorities around the world have also called on passengers to stop using the devices during flights. About three dozen of the phones, released just three weeks ago, had batteries that caught fire or exploded.