Prospect of US rate rise leads to Asia Pacific shares sell-off

Broad index of Asian shares see biggest drop since Brexit shock as European markets set to follow suit

A quotation board in Tokyo displays the Nikkei 225 average in early trading
A quotation board in Tokyo displays the Nikkei 225 average in early trading

Shares fell across Asia Pacific on Monday with UK and European stock markets poised to follow suit after investors were rattled by the prospect of a rise in US interest rates as early as next week.

Following the lead from a sharp sell-off on Wall Street, Japan’s Nikkei average was down 1.51% while the MSCI index for other shares across the region fell 2.2%. It was the largest daily drop since the frenzy caused by Britain’s vote in late June to leave the European Union.

Australian stocks sank 2.22% at 1.30pm local time with the country’s large banking sector badly hit by suggestions that the US Federal Reserve could raise borrowing costs at its meeting next week.

A near 4% fall in oil prices, also put pressure on the Australian marlket where the large resopurces companies such as Rio Tinto, BHP Billiton and Woodside Petroleum were all down.

The FTSE 100 benchmark in London was set to open down nearly 100 points, or almost 1.5%, according to online trading firm IG. Germany’s Dax 30 was set to drop 231 points, or 2.2%.

No less than three Fed officials are expected to speak later on Monday, including board member and noted dove Lael Brainard. Any hint of hawkishness would likely further pressure bonds and equities.

“Market participants are wondering if maybe [Brainard] is being wheeled out to give the market one last warning of a rate hike at next week’s meeting,” said Marshall Gittler, head of research at broker FXPRIMUS.

“The thinking is that if someone as dovish as she is starts talking like a hawk, people will notice. Her speech will be closely examined.”

Chris Weston at IG in Melbourne said: “Perhaps Lael Brainard can cool tensions of a near-term hike from the Fed. However given her pessimistic view of late expect any clear hints of a hike this year to be magnified, in turn causing the global sell-off in fixed income to ramp up.”

Such risks led the Chicago Board options exchange volatility index to close at its highest level since late June on Friday. The Dow shed 2.13% on Friday, while the S&P 500 lost 2.45% and the Nasdaq 2.54%.

In the forex market, the sudden bout of risk aversion benefited safe havens such as the yen while hitting carry trades in higher yielding currencies including the Australian dollar.

Adding to the jittery mood on Monday was news that Democratic candidate Hillary Clinton fell ill at a memorial ceremony for the victims of the 9/11 attacks in New York and had been diagnosed with pneumonia.

Markets have generally assumed Clinton would win the presidency and have not properly priced the implications, both economic and for national security, should Donald Trump prevail.

Geopolitical concerns had already been inflamed by North Korea’s fifth and biggest nuclear test, ratcheting up a threat that its rivals and the United Nations have been powerless to contain.