Asian stocks, FX weaken on Mideast tensions; central bank meetings in focus
Most Asian stock markets retreated on Monday and currencies edged down against a resilient dollar as the escalating conflict between Israel and Iran weighed on risk sentiment, while investors braced for several central bank meetings this week.
Bank Indonesia is set to announce its monetary policy decision on Wednesday, hours before the U.S. Federal Reserve, and is broadly expected to keep its benchmark interest rate steady after a surprise rate cut last month.
The Bangko Sentral ng Pilipinas (BSP) is expected to cut its key policy rate by 25 basis points, while Taiwan's central bank is likely to maintain its interest rate given the strong performance of the tech-focused economy.
Both central banks announce their rate decisions on Thursday.
The Philippine peso weakened 0.4% on the day, while the Taiwanese dollar, which touched a fresh three-year high last week and is up more than 10% this year, edged up 0.2%.
The Thai baht weakened 0.3%, and the Indian rupee inched down 0.1%. "Investors are cautious and watching if the Israel-Iran conflict could escalate and lead to disruptions in energy production and shipping. This could keep EM Asian currencies on the back foot against the USD," said Wei Liang Chang, FX and credit strategist at DBS.
Most emerging Asian economies import the bulk of their oil requirements and an increase in crude prices weighs on current account deficits and hurts their currencies.
Oil prices extended their rally after fresh strikes by Israel and Iran over the weekend stoked fears the conflict could widen and disrupt oil exports from the Middle East.
Safe-haven flows into the greenback also kept Asian currencies under pressure. Malaysia stands out as the only net oil and gas exporter in the region. Its currency was flat on Monday.
Regional equities were broadly lower, with stocks in Bangkok falling 1.2% to a more than two-month low. Stocks in Manila, Singapore and Kuala Lumpur fell between 0.3% and 0.6%.
However, South Korean shares rose 0.9% after authorities vowed to closely monitor financial markets and deploy "immediate and bold measures" in case of heightened volatility.
Analysts at Nomura said that while previous geopolitical events have typically caused only temporary market volatility, the recent strong rally in equities suggests a potential for de-risking and profit-taking.
"Asian stocks could be particularly vulnerable through two channels: sustained higher oil prices impacting oil-importing countries; and risk-off sentiment affecting high-beta markets more severely."
HIGHLIGHTS:
** China's May factory output slows, retail sales surprisingly upbeat
** G7 leaders in Canada to discuss Israel-Iran conflict, hope to avoid Trump clash
** BOJ's policy decision scheduled for Tuesday - Reuters
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