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Oil Prices and Asian Markets Tumble Yet Again

February 3, 2016

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Down again.Photograph by Greg Baker – Getty Images

Asian shares tumbled on Wednesday as oil prices dropped for a third day, prompting investors to seek shelter in safe-haven assets and lifting bonds and gold to multi-month highs.

The MSCI’s broadest index of Asia-Pacific shares outside Japan fell 2.1%, led by a 2.7% fall in Hong Kong shares.

Japan’s Nikkei lost 3.2%, wiping out almost all of its gains made after the Bank of Japan on Friday had announced it would introduce negative interest rates. Overnight, the U.S. S&P 500 index fell 1.9%.

The selloff extended to European markets. The pan-European FTSEurofirst 300 index, which fell 2% on Tuesday, was down by 0.4% in early trading. The euro zone’s blue-chip Euro STOXX 50 index fell 0.5% and Germany’s DAX 0.7%.

“There’s no sign of improvement in the oil market. Demand is slowing in many emerging markets and in the U.S, which is the world’s biggest consumer, oil inventories stood high,” said Shuji Shirota, head of macro economic strategy at HSBC in Tokyo.

Brent crude futures, the world’s oil benchmark, fell 0.7% to $32.48 per barrel, extending losses so far this week to more than 6%. U.S. crude futures slipped 0.5%.

Hopes for an agreement to cut production dimmed this week as no deal has emerged and talks between Russia’s energy minister and Venezuela’s oil minister on Monday failed to result in any clear plan to reduce output.

Oil prices have fallen about 70% in the past 18 months, largely due to a growing supply glut but also exacerbated by cooling economic growth in China and other emerging markets.

China has set its economic growth projection range at 6.5 to 7%, an official from the country’s top economic planner said at a briefing on Wednesday. That’s compared to GDP growth of 6.9% in 2015 and 7.3% in 2014.

The gloom pervading markets bolstered the allure of government debt. As U.S. debt prices jumped, the 10-year U.S. yield hit a 10-month low of 1.828%.

Dwindling bond yields around the globe made precious metals, which pays no interest, attractive asset for many investors, especially at a time when central banks in Japan and Europe are now adopting negative interest rates.

Gold hit a three-month high of $1,130.90 per ounce on Tuesday and last stood at $1,128.3.

Investors are now anxiously awaiting U.S. economic data in coming days, starting with the services sector survey due later in the day.

“The U.S. economic data has been soft especially in the manufacturing sector so the key is how much the services sector is holding out,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

The U.S. ISM non-manufacturing PMI is expected to dip to 55.1 in January from 55.8 in December. That would be the lowest reading in almost two years but still above the 50 mark that separate contraction and expansion.