Asia stock markets mostly higher despite hawkish Fed comments; Nikkei rose 0.5%

Most Asian stock markets gained Friday, retracing earlier losses, despite a fresh stream of hawkish commentary from U.S. Federal Reserve officials.

Japan’s benchmark Nikkei 225 index ended up 0.54 percent, or 89.69 points, at 16,736.35, erasing earlier losses, and the yen strengthened a bit against the U.S. dollar, possibly in a risk-off shift toward the safe-haven currency. The dollar-yen pair was at 110.20 at 2:23 p.m. SIN/HK, after spending much of the session hovering around 110, compared with levels as high as 110.34 Thursday.

Hong Kong’s Hang Seng Index added 1.06 percent by 3:19 p.m. SIN/HK after dropping for the past two sessions. On the mainland, the Shanghai Composite ended up 0.68 percent, or 19.03 points, at 2825.94, and the Shenzhen Composite gained 1.07 percent, or 19.067 points, to finish at 1794.95.

Australia’s S&P/ASX 200 index ended up 0.53 percent, or 27.958 points, at 5351.30 as the energy and materials sub-indexes rose 0.71-0.93 percent, retracing some recent losses. South Korea’s Kospi inched up 0.05 percent, or 0.89 point, to 1947.67 after wavering between positive and negative territory.

The muted reaction to the possibility of tighter U.S. monetary policy comes as markets aren’t pricing in much chance of a potential Fed hike, with analysts saying market indicators suggested a roughly 30 percent likelihood of a June step higher.

That may be because some market players are taking the Fed’s signals with grains of salt.

“People are already starting to wonder how much truth there is to a summer rate hike, or if it is one of the Fed’s countless charades,” said Mark Matthews, head of research for Asia at private bank Julius Baer, in a note Friday. “They don’t want people to think there will never be a rate hike, so they have to have the threat of one out there.”

But he noted that the Fed doesn’t want the U.S. dollar to appreciate — a likely outcome of a rate hike. He added that the Fed is also known to call off plans to hike rates if there are sudden market moves in stocks, the dollar and emerging markets.

It’s not clear that a relatively subdued response to the prospect of a hike would necessarily bite market players, analysts said.

“The markets are complacent about the risks of further tightening over the next couple of years,” Julian Jessop, chief global economist at Capital Economics, said in a note Thursday. “Context, however, is everything: the gradual normalization of U.S. interest rates will remain contingent on favorable economic and financial conditions that should limit the downside for asset prices.”

Fed officials continued to send clear signals to the market on Thursday that a June interest rate hike could be on the cards.

New York Fed President William Dudley said that June was definitely a live meeting and that he was quite pleased market expectations for the probability of a June or July rate hike had moved up.

Those comments raised analysts’ radar over the Fed’s likely steps.

“If one of the most dovish members of the central bank thinks that a rate hike is imminent, then perhaps investors really need to re-think and re-price their expectations for tightening this year,” said Kathy Lien, managing director for foreign-exchange strategy at BK Asset Management, in a note late Thursday.

Additionally, Richmond Fed President Jeffrey Lacker said on Bloomberg Radio that he was comfortable with four Fed rate hikes in 2016.

The remarks followed the release of the minutes for the Fed’s April meeting, which sounded remarkably clear hawkish signals to the market.

Source: CNBC