Asian stocks slide on weak China data, yen dives as BOJ tweaks yield control

SINGAPORE  – Asian equities slid on Tuesday as disappointing activity data from China revived some worries over the world’s second-largest economy, while the yen weakened past 150 per dollar after the Bank of Japan tweaked its bond yield control policy.

MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.86 percent lower, hovering close to the one-year low it touched last week. The index is down 4 percent in October and on course for third straight month in the red.

The yen fell 0.8 percent against the dollar to touch a session low of 150.25 after the central bank said the 1 percent ceiling on benchmark 10-year yields would be an upper bound rather than a rigid cap. It maintained the 0 percent target for the yield under its yield curve control (YCC) policy.

Under criticism that its heavy defense of the cap is causing market distortions and an unwelcome yen fall, BOJ had raised its de-facto ceiling for the yield to 1 percent from 0.5 percent in July.

Analysts viewed the move by the central bank on Tuesday as a small step towards dismantling the long-running and controversial YCC policy.

“The BOJ apparently feared that sticking to 1 percent would force the Bank to purchase a large amount of government bonds and further weaken the yen,” said Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corporation.

“As a result, the YCC framework seems to have become more of a dead letter.”

A report from the Nikkei newspaper on Monday that said BOJ is considering adjusting its yield curve control policy helped push the yen to a two-week peak of 148.81 per dollar but the fragile currency gave up all its gains after the BOJ decision.

Nicholas Chia, macro strategist at Standard Chartered, said most of the “good news” were already in the price, after the Nikkei report.

“The immediate price action in dollar/yen suggests that markets were disappointed by the tweak and the absence of a new ceiling – gives the impression the BOJ will massage the run up in yields going forward.”

The yield on 10-year JGB eased a bit following the announcement but remained at decade-high levels.

The central bank, which maintained its ultra-loose monetary policy, also removed a pledge to defend the 1 percent level with offers to buy unlimited amount of bonds.

China data spooks markets

Data on Tuesday showed that manufacturing activity unexpectedly returned to contraction in October, casting a cloud over recent indicators that showed a nascent recovery in China.

The Shanghai Composite Index fell 0.37 percent lower, while Hong Kong’s Hang Seng Index sank 1.85 percent after the data.

Nomura analysts said it was still too early to call the bottom, noting that they expect economic conditions to remain poor or even deteriorate further in coming months.

Futures indicated stocks in Europe were set for a subdued open, with the Eurostoxx 50 futures down 0.15 percent , German DAX futures down 0.05 percent and FTSE futures 0.08 percent lower ahead of inflation data for euro zone.

Investor focus this week will mainly be on the major central bank meetings, with the U.S. Federal Reserve and Bank of England also due to meet.

Later on Tuesday, the Federal Open Markets Committee (FOMC) will convene for a two-day monetary policy meeting, which is expected to culminate in a decision to let the Fed funds target rate stand at 5.25 percent -5.50 percent .

A slew of recent data showed the U.S. economy remains resilient and comments from Fed Chair Jerome Powell will be scrutinized to gauge how long interest rates are likely to stay elevated.

The Treasury Department said on Monday it expects to borrow $76 billion less this quarter than anticipated in the third quarter on expectations of higher revenue receipts.

The yield on 10-year Treasury notes was up 0.9 basis points at 4.886 percent .

The dollar index, which measures U.S. currency against six rivals, rose 0.16 percent . Sterling was last at $1.2147, down 0.17 percent on the day, while the euro was down 0.08 percent at $1.0605.

In commodities, oil prices rose in Asian trade after a drop of more than 3 percent in the previous session, as worries over supply stirred by conflict in the Middle East blunted a dismal showing of China data.

U.S. crude rose 0.68 percent to $82.87 per barrel and Brent was at $88.10, up 0.74 percent on the day.

Spot gold eased 0.2 percent to $1,991.39 after slipping below the $2,000/ounce milestone in the previous session.