Asian shares fall as bets off on sharp US rate cuts

Asian shares fell on Monday after strong US jobs data tempered expectations for a Fed rate cut, while the Turkish lira hovered near two-week lows on worries about central bank independence. Share sentiment was also dampened by US investment bank Morgan Stanley’s decision to reduce its exposure to global equities due to misgivings about the ability of policy easings to offset weaker economic data.

Asian shares were broadly weaker on Monday, tracking Wall Street which fell from record highs last week. MSCI’s broadest index of Asia-Pacific shares outside Japan lost more than 1%, with every market in the red. Japan’s Nikkei faltered 0.9%. Chinese shares started lower with the blue-chip index off 1.7% and Hong Kong’s Hang Seng index down 1.5%.

South Korea’s KOSPI was off 1.8% and Australian shares slipped about 1% to a five-week low. “We are lowering our exposure to global equities to the range we consider ‘underweight’,” Morgan Stanley’s London-based strategist Andrew Sheets said in a note. The previous range was ‘neutral’.

Expensive valuations and pressure on earnings were among the reasons for the downgrade, Sheets said, while the bank increased its exposure to emerging markets sovereign credit and safe haven Japanese Government Bonds. Global equities have generally been bolstered by expectations that central banks will keep interest rates at or near record lows to boost economic growth. Those expectations were tempered by a US labour report that showed nonfarm payrolls jumped 224,000 in June, beating forecasts for 160,000, in a sign the world’s largest economy still had fire.

Given the strength shown in that data, investors now expect US Federal Reserve chair Jerome Powell to go slow on rate cuts this year. Bets for aggressive Fed easings are already off, with the market now pricing a 27 basis points easing this month, from 33 basis points prior to payrolls.

Powell will provide further cues on the near-term outlook for monetary policy this week at his semi-annual testimony to the US Congress. There was some positive news on the protracted China-US trade war with White House Economic advisor Larry Kudlow confirming that top representatives from the United States and China will meet in the coming week for trade talks.

“Whether the negotiators can find a solution to the difficult structural issues that remain between the two sides is another matter, and Kudlow cautioned there was ‘no timeline’ to reach an agreement,” National Australia Bank strategist Rodrigo Catril said.