February 28, 2018 / 3:22 AM / 3 months ago

GLOBAL MARKETS-Asian shares lurch lower as weak China PMI adds to Fed rate worries

* MSCI Asia-ex Japan down 0.7 pct, set for second straight fall

* Nikkei off 0.4 pct, Chinese, HK indexes also skid

* Fears of faster U.S. rate rises after Jerome Powell’s testimony

* China factory growth slows more than expected

*

By Swati Pandey

SYDNEY, Feb 28 (Reuters) - Asian shares extended losses on Wednesday and bonds were sold off as weak factory data from China revived worries about global economic growth amid fears of faster rate rises in the United States.

MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.7 percent, on track for a second straight day of losses.

It is down more than 4.5 percent in February after global equity markets were mauled at the start of the month by worries U.S. inflation is picking up.

Japan’s Nikkei stumbled 0.4 percent on a slightly firmer yen, while S&P futures slipped 0.3 percent.

China’s blue-chip CSI300 skidded 0.8 percent while Shanghai’s SSE Composite and Hong Kong’s Hang Seng index each declined more than 1 percent.

Asian markets had opened mildly lower but selling intensified after data showed growth in China’s manufacturing sector in February slowed more than expected to the weakest in over 1-1/2 years as the Lunar New Year holidays disrupted business activity and tougher pollution rules curtailed factory output.

Growth in China’s services industry also slowed, suggesting the key sector was starting to display signs of fatigue. The services sector accounts for over half of China’s economy.

However, analysts cautioned the timing of the long holiday may have skewed the activity readings, and a clearer picture of conditions in China may not emerge for another month.

Sentiment was already sour after Fed’s Jerome Powell gave an upbeat view of the U.S. economy on Tuesday and said recent data had strengthened his confidence on inflation.

When asked about likely catalysts for more than three rate hikes in 2018, he said each member would write a new “dot plot” rate path ahead of the March meeting and that he wouldn’t want to prejudge that outcome.

Rate futures fell following Powell’s remarks as traders began pricing in about a one-in-three chance of a fourth hike this year.

Fears of faster U.S. rate hikes have caused anxiety that other central banks will start to tighten policy and raise borrowing costs. That would in turn hurt corporate earnings, clouding the outlook for what had been expected to be another solid year of global economic growth.

“Today’s comments appear to open the door for others on the (Fed) Committee to revise their forecast as they see fit, and that Powell himself may be inclined to look for four hikes this year,” JPMorgan economist Michael Feroli said in a note.

“We are naturally more confident in our standing call for four hikes this year and another four next year.”

The Fed moved three times in 2017 and is seen as certain to do the same or more this year, with the first move expected as early as March.

Responding to Powell, equity markets in Europe and Wall Street turned south with the Dow, the S&P 500 and the Nasdaq falling more than 1 percent each.

BONDS AND CURRENCIES

Treasury prices slipped with yields on the 10-year U.S. note rising past 2.9 percent.

The dollar held on to gains after rallying against most major currencies overnight.

It hovered near a recent 1-1/2 month top against the Australian dollar and held near a three-week high on the euro at $1.2227.

However, it did not fare well against the Japanese yen, a perceived safe haven.

Dollar bulls were wrongfooted after the Bank of Japan announced it would trim the amount of super long Japanese government bonds it offered to purchase at its regular debt-buying operation.

In commodities, oil prices extended declines into a second day fell as industry data showed an increase in U.S. crude and gasoline stockpiles.

Brent crude futures fell 31 cents to $66.32 a barrel, while U.S. crude was last down 37 cents at $62.64.

Spot gold eased to $1,317.31 an ounce, not far from Tuesday’s $1,313.26 which was the lowest in three weeks.

Reporting by Swati Pandey Editing by Eri Meijer and Kim Coghill

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