Asian stocks fall after rally, Aussie dollar drops

Sydney - Asian equity markets slipped from a two-year high in the absence of catalysts to spur further gains, while the Australian dollar slumped.

Investors are stepping back after a rally on Monday sent South Korean equities to a record and Japan’s Topix to the highest since December 2015. Chinese stocks extended a selloff that has erased more than $500bn from equity values amid a crackdown on financial leverage. The Aussie fell to the lowest level since January after disappointing retail sales data.

“Markets have been struggling to make significant headway,” said Ric Spooner, chief market analyst in Sydney at CMC Markets. “Full valuations have pre-empted a benign macro scenario of ongoing moderate growth, and markets appear to need good news to hold them around current valuations.”

Stocks are trading at record levels amid optimism over the global economy. Volatility is declining to multi-year lows in fixed-income and stock markets as labor-market strength and earnings continue to buoy growth, while concerns over French elections have disappeared following Emmanuel Macron’s victory this week.

Investors will be parsing comments from Federal Reserve Bank of Minneapolis President Neel Kashkari later Tuesday for any clues on US central bank policy. South Korean voters are going to the polls to elect their next president, while Australia’s Treasurer will deliver his budget Tuesday evening in Canberra at a time when the country’s top credit rating is said to be at risk.

Key events coming up this week:

Earnings continue to be released with Walt Disney, Mitsubishi, Toyota and Deutsche Telekom among those notable. Voting is under way in South Korea to elect a new president following the ouster of Park Geun-hye in a corruption scandal.

Australian Treasurer Scott Morrison will deliver his budget in Canberra. Economists predict a A$28bn budget deficit in the year through June 2018, about A$700m less than the government forecast in its December update.

Here are the main moves in markets:

Stocks

The MSCI Asia Pacific Index fell 0.5% as of 08:07. The gauge closed on Monday at the highest level since June 2015. Japan’s Topix index fell 0.3% after jumping 2.3% in the previous session, its biggest one-day gain since January. The Shanghai Composite Index dropped 0.1% after a selloff brought the gauge to the lowest level since October.

Hong Kong’s Hang Seng rose 0.5%, while Taiwan’s Taiex Index fell 0.2% after erasing an earlier advance. South Korea’s market is closed on election day. Australia’s S&P/ASX 200 Index dropped 0.6%. Banks fell after media reports the government is set to impose a A$6bn levy on lenders in Tuesday’s budget, and Commonwealth Bank of Australia posted weaker-than-expected earnings. 

Futures on the S&P 500 slipped less than 0.1% after the underlying gauge rose less than one point to a record on Monday. The VIX index, a gauge of volatility in the US equity market, tumbled to the lowest level since 1993. Contracts on the Euro Stoxx 50 climbed 0.3%. The Stoxx Europe 600 fell 0.1% on Monday, after closing at the highest level since August 2015 last week.

Currencies

The Australian dollar dropped 0.5% to the lowest since January 10 as retail sales data further weakened the outlook for the nation battling a slump in prices of iron ore. The Bloomberg Dollar Spot Index rose 0.1%, after jumping 0.5% on Monday. The yen slipped 0.1% to 113.34 per dollar.  The euro traded at $1.0925, little changed.

The currency fell 0.7% on Monday following Macron’s victory as France’s next president, after trading at the highest level since November.

Bonds

The yield on 10-year Treasury notes slipped one basis point to 2.38%, after climbing four basis points on Monday. Yields on Australian government debt with a similar maturity rose one basis point to 2.68%.

Commodities

Gold gained 0.1% to $1 226.97 an ounce, halting a four-day decline. Oil slipped 0.2% to $46.36 a barrel after a two-day advance, as investors awaited government data on US crude supplies. Iron ore futures fell 1.2% as concern builds about the outlook for rising supply and China’s clampdown on leverage.

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