Asian markets a reluctant spectator to U.S. political theater

© Reuters. Pedestrians are reflected in a window in front of a board displaying stock prices at the Australian Securities Exchange in Sydney

By Wayne Cole

SYDNEY (Reuters) - Asian stocks were subdued on Monday as investors fretted that political instability in the United States was leaving the country rudderless at a time when the global economy was showing signs of faltering.

Moves were limited by a holiday in Japan while many bourses are set to close early for Christmas. MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) lost 0.5 percent to its lowest in seven weeks.

Yet Chinese blue chips (CSI300) managed to edge up 0.2 percent, while E-Mini futures for the S&P 500 (ESc1) recouped early losses to rise 0.4 percent.

U.S. President Donald Trump's budget director and chief of staff on Sunday said the partial U.S. government shutdown could continue into January, when the new Congress convenes and Democrats take over the House of Representatives.

Trump on Sunday said he was replacing Defense Secretary Jim Mattis two months early, a move officials said was driven by the president's anger at Mattis' resignation letter and its rebuke of his foreign policy.

Sources also told Reuters Trump has privately discussed the possibility of firing Federal Reserve Chairman Jerome Powell, a move that would likely roil financial markets.

Treasury Secretary Steven Mnuchin felt it necessary to personally call the heads of the six largest U.S. banks to calm nerves and made plans to convene a group of officials known as the "Plunge Protection Team."

"It provides more than enough fodder for perceptions of chaos and instability in the White House," said Ray Attrill, head of FX strategy at NAB.

"At the same time, the government shutdown offers a true foretaste of what lies ahead once the new Congress in sworn in on January 3."

GLOBAL SLOWDOWN

The political uncertainty has only added to the air of risk aversion, punishing equities to the benefit of bonds.

The Nasdaq (IXIC) has fallen nearly 22 percent from its Aug. 29 high and into bear territory, while the S&P 500 (SPX) was on track for its worst December since the Great Depression.

At the same time 10-year Treasury yields were near their lowest since August at 2.79 percent , having fallen over 40 basis points in just six weeks.

The gap between two- and 10-year yields has shrunk to only 14 basis points, a flattening of the curve that has sometimes heralded economic turning points in the past.

"Many of the financial and economic indicators that turn first around business cycle peaks are now flashing red in advanced economies," warned Simon MacAdam, global economist as Capital Economics.

"This is consistent with our view that the recent loss of momentum in the world economy will develop into a more severe slowdown in 2019."

The flight to safe havens was again boosting the Japanese yen, with the dollar near a three-month trough at 111.02 yen on Monday.

It fared better on the euro, which was undermined by a run of poor data out of Europe. The single currency hovered at $1.1376 (EUR=), after being as high as $1.1485 last week.

Against a basket of currencies, the dollar index was a shade softer at 96.835 (DXY).

In commodity markets, gold held near its recent six-month peak as the dollar eased and the threat of higher U.S. interest rates waned. Spot gold stood at $1,261.05 per ounce.

Oil prices were near their lowest since the third quarter of 2017, having shed no less than 11 percent last week. [O/R]

U.S. crude was last unchanged at $45.59 a barrel, while Brent (LCOc1) dipped 12 cents to $53.70.