By Ese Erheriene

Traders brace for tightening from the U.S. Federal Reserve and loosening from the Bank of Japan

Asian shares were largely off Wednesday, as traders braced for an expected tightening from the U.S. Federal Reserve, and expected loosening from the Bank of Japan.

Japan's Nikkei Stock Average sank 0.7%, taking its losses to 2.3% in the past five trading sessions. The Shanghai Composite Index slipped 0.7% while the Hang Seng Index closed down 0.1%.

Overnight, the main U.S. indexes closed lower as investors focused on possible action by the Fed at its meeting next week. According to the Chicago Mercantile Exchange's FedWatch tool (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html), the market believes there is a 15% chance of an interest-rate rise in September, with a near 55% chance of a rate increase in December.

"There's a lot of uncertainty as markets are unable to find a clear explanation on what's going to happen with the upcoming Fed meeting," said Alex Wijaya, a senior sales trader at CMC Markets. "There's a lot of mixed messages."

However, the Bank of Japan, which also has a policy meeting next week, seemed to be heading in the other direction. Japanese bank stocks were hit Wednesday by a Nikkei report which said that the BOJ was considering an interest-rate cut at next week's policy meeting, taking rates deeper into the negative territory.

The yen weakened about 0.6% against the U.S. dollar after the Nikkei newspaper said the BOJ intended to make its rate policy the centerpiece of its monetary easing, as the effectiveness of asset-buying has neared its limit.

The yen was also at a disadvantage against the dollar, which has gained on expectations of hawkish comments coming from the U.S. Fed next week, according to Roy Teo, a senior forex strategist at ABN Amro.

While a cheaper yen is good for Japan's exporters, lower interest rates hurt the net interest margin of Japanese banks. Mitsubishi UFJ Financial Group Inc.(MTU) ended down 3.2% Wednesday, Shinsei Bank Ltd. (8303.TO) closed 1.9% lower and Sumitomo Mitsui Financial Group Inc. (8316.TO) was off 1%.

The BOJ is also widely thought to be trying to steepen Japan's yield curve, by focusing its purchases of government bonds on shorter dated maturities.

"[A steeper curve] would be negative for bank stocks, but good for life insurance companies," said Tomoichiro Kubota, senior market analyst at Matsui Securities.

A rebound in oil prices buoyed Australian stocks, with the S&P/ASX 200 index closing up 0.4%. Malaysia's Bursa was off 0.9%. Brent, the global benchmark, was last up 0.6% at $47.39 a barrel.

The market remains widely skeptical of oil price gains after an announcement by the International Energy Agency on Tuesday that global oil supply would outpace demand well into next year, a reversal of its position a month ago, when it said that the market would show no surplus this year.

Hong Kong's yuan overnight interbank-borrowing cost, jumped to 8.16%, its highest level since Feb. 19 and up from 2.84% on Tuesday. It exceeded 5% both on Monday and last Thursday.

Market participants said yuan buying by branches of Chinese state-owned banks in Hong Kong was likely behind the rise in borrowing costs, and that the buying was likely directed by the People's Bank of China.

The central bank's intervention in the so-called "offshore" yuan market is likely aimed at curtailing bets that the yuan will decline. The PBOC didn't immediately answer a request for comment.

 

(END) Dow Jones Newswires

September 14, 2016 07:08 ET (11:08 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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