Asia Stocks Fall on Likely Smaller Fed Rate Cut, Pricier Oil

Asia stocks fell on Monday as investors scaled back expectations of an aggressive Federal Reserve interest rate cut, while crude oil prices rose on heightened Middle East tensions following Iran’s seizure of a British tanker.

MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.4%.

Japan’s Nikkei closed down 0.2% on the more tempered Fed easing views and caution ahead of the domestic earnings season, which starts this week.

The Shanghai Composite Index was down 1%, but all eyes were on the debt of China’s new Nasdaq-style STAR tech board. It had a wild opening day as expected, with most firms surging and circuit breakers popping in early trade.

Hong Kong’s Hang Seng dropped 0.9%. South Korea’s Kospi was flat.

In early European trade, the pan-region Euro Stoxx 50 futures were up 0.06%, German DAX futures inched up 0.02% and Britain’s FTSE futures added 0.05%.

Global equity markets rose briefly toward the end of last week, after dovish comments by New York Fed President John Williams boosted expectations that the central bank would lower rates by 50 basis points (bps) at its July 30-31 meeting.

But stock markets gave back those gains on Friday, with Wall Street shares falling, after the New York Fed walked back Williams’ comments by saying his speech was not about potential policy action at the upcoming Fed meeting.

Expectations for a larger cut were scaled back even more after the Wall Street Journal reported the Fed was likely to cut rates by 25 bps this month, and may make further cuts in the future, given global growth and trade uncertainties.

“The possibility of a 50 bps cut has almost dissipated following the WSJ report and the New York Fed’s attempt to tone down earlier comments by Williams,” wrote Kenji Yamamoto, economist at Daiwa Securities.

The dollar and U.S. Treasury yields rose on the greater likelihood of a shallower rate cut.

The dollar index against a basket of six major currencies was steady at 97.174 after rising 0.4% on Friday.

The euro was little changed at $1.1216 after shedding 0.5% on Friday. The greenback edged up 0.25% to 108.00 yen thanks to a rise in U.S yields.

The benchmark 10-year Treasury yield stretched Friday’s modest gains and climbed to 2.062%.

Still, the broad decline in equity markets limited the rise in safe-haven Treasury yields.

“A factor which could guide stocks lower this week are tweets by U.S. President Donald Trump pertaining to trade issues with China,” said Junichi Ishikawa, senior forex strategist at IG Securities.

“Stocks could decline if he continues to make challenging trade comments directed at China this week.”

Trump maintained pressure on Beijing last week by renewing a threat to impose tariffs on another $325 billion of Chinese goods, even as hopes grew that the two sides could soon resume face-to-face negotiations in a bid to end their year-long trade war.

In commodities, Brent crude futures were up 1.55% at $63.44 per barrel following an increase of about 0.9% on Friday.

Iran’s Revolutionary Guards on Friday captured a British-flagged oil tanker in the Strait of Hormuz after Britain seized an Iranian vessel earlier this month, further raising tensions along a vital international oil shipping route.

U.S. crude futures advanced 0.77% to $56.06.

Gold slipped from a six-year high as the dollar firmed and as expectations for a deep rate cut by the Fed were dialed back.