OCPNY Olympus Corporation (PK)

By Jake Maxwell Watts 

Asian markets are on track for one of their worst quarters since the global financial crisis, with the double threat of higher interest rates in the U.S. and China's slowdown unlikely to ease heading into October.

While regional stocks and currencies recovered from Tuesday's steep losses in the last trading day of the quarter, the period was a bruising one for nearly all of Asia's markets.

China's main stock market posted its worst quarter since 2008 and its smaller Shenzhen index, in at least two decades. Markets in Singapore and Indonesia are set to post their worst quarters since the financial crisis. The MSCI Asia ex-Japan Index fell 19.1% from the beginning of the quarter through Tuesday's close.

Currencies in Asia also are on track for their biggest quarterly losses in years. Asia's worst performing currency, Malaysia's ringgit, lost as much as 14% of its value this quarter and is down 26% for the year, while Thailand's baht has weakened close to a five-year low, with its worst quarterly performance since 2000.

Adding to the gloom, industrial metals, including copper and zinc have fallen to multiyear lows. Prices for Brent crude oil, the international benchmark, have halved since this time last year.

"Risk forecasts are turning into a pessimist's paradise," said Olivier d'Assier, managing director for Asia Pacific at risk consultant Axioma. "If the risk forecast is low, don't believe it, and if it's high, it's probably worse than you think," he said.

The surprise devaluation of China's currency in August, after weeks of roller-coaster stock-market performance, raised the possibility that a slowdown in the world's No. 2 economy may be deeper than official data reveals, with a fresh reading on the factory activity due Thursday. That's a challenge for economies in the region reliant on Chinese demand for their exports.

Moreover, the prospect of higher interest rates in the U.S. still looms large, which already has started to draw money from the region. Investors pulled $40 billion from emerging-market stocks and bonds in the second quarter, the worst quarterly performance since the throes of the global financial crisis, according to the Institute of International Finance.

While the U.S. Federal Reserve said it would delay raising interest rates earlier this month--citing instability in China and other emerging markets, among several factors--that emphasis has started to recede from more recent comments, leaving the chances of an increase before year-end on the table.

That has darkened the outlook for regional economies and sent government bond yields higher, as foreign investors shed their holdings. Yields, which move inversely to prices, on five-year Indonesian government bonds rose steeply this quarter to their highest since 2009, having risen 1.6 percentage points over the period to 9.767% Wednesday. Malaysian five-year benchmark yields posted their largest quarterly rise since early 2009.

The dynamic of rate uncertainty and a slowdown in China--one of the world's biggest consumers of oil, metals and food--has pressured commodities, too. Many are priced in U.S. dollars, and a stronger currency on expectations of higher rates has snuffed out demand as materials got more expensive for global buyers.

Prices of copper--a proxy for consumer demand, since it shows up in items from refrigerators to televisions--remains close to a six-year low reached after China's devaluation. The red metal rebounded by mid-September after some producers announced production halts, but drifted lower again to $4,915 per ton. Reports overnight about protests at a Peruvian mine and supply cuts in Chile helped the metal recover in Asia on Wednesday.

Worries about oversupply and weak Chinese demand also have pressured prices of zinc, which fell to a five-year low last week. Zinc is primarily used as an anti-corrosive for steel, of which China is the largest producer. It is currently trading at $1,661.50 per ton.

Earlier this week, concerns about the debt load of mining-and-trading firm Glencore PLC gave investors fresh reasons to fear the ripple effects of China's waning appetite for commodities, and sparked heavy selling across global markets.

By Wednesday, Asian stocks rebounded from near their lowest levels this year, following a slight gain overnight in U.S. markets.

"We could see some steady trade in the Asian equity markets today, but...a full risk-on mode is very unlikely. Furthermore, most Asian bourses are expected to cap off September with another month of losses," said Bernard Aw, market strategist at IG.

In the three months to Tuesday's close, Indonesia's main index had fallen nearly 15% and China's two main stock markets had fallen about 30% each.

In the last trading day of the quarter, the S&P/ASX 200 index in Australia rose 2.1% to 5021.60, while Japan's Nikkei 225 gained 2.7% to 17388.15. Still, the Nikkei closed out its worst quarter since 2010 and the ASX its worst since 2011.

In other markets, China's Shanghai Composite gained 0.5% to 3052.78 and the Shenzhen Composite gained 0.3% to 1716.78.

Hong Kong's main index was up 1.7%, South Korea's Kospi gained 1% and Singapore's FTSE Straits Times Index rose 0.3%.

In currency markets, the Japanese yen weakened slightly against the U.S. dollar. One U.S. dollar bought Yen120.07 Wednesday, compared with Tuesday's close of Yen119.71. The Australian dollar traded at US$0.70 against the U.S. dollar, compared with US$0.6982 a day earlier.

Brent crude oil is down 0.8% in Asia trade at $48.48 a barrel.

Later this week, investors will get an update on the U.S. job market, which could give guidance on the Fed's timeline for rate increases. On Thursday, China will release manufacturing data for September, though Chinese markets will close from Thursday through to Oct. 7 for a national day holiday. Hong Kong's markets will close Thursday.

Anjani Trivedi and Biman Mukherji contributed to this article.

Write to Jake Maxwell Watts at jake.watts@wsj.com

(END) Dow Jones Newswires

September 30, 2015 04:00 ET (08:00 GMT)

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