Asian equity optimism quickly dissipates
Wall Street was saved by a very dovish Jerome Powell overnight, whose testimony managed to reverse the aggressive sell-off that was sweeping US equity markets. The S&P 500 finished 0.13% higher, although the Nasdaq closed 0.50% lower, having been 3.5% lower earlier in the session. The Dow Jones finishing higher by just 0.04%. Inflation fears continue to nag equity markets, coming as they do, with equity investors long to the gunnels, notably in tech.
A modest rally in US futures this morning has been quickly snuffed out, with all three indices now at unchanged levels. That has been enough to reverse sentiment in much of Asia, clearly still nervous about further US pullbacks. The Nikkei 225 has returned from a holiday, playing catchup as it falls 1.15% today. The Kospi, though, is clinging to a 0.25% gain.
Mainland China markets are under pressure, with the Shanghai Composite down 1.15% and the CSI 300 1.20% lower. Fears continue to nag mainland investors that the OBIOC will continue to withdraw liquidity and erode the implicit stimulus backstop. Ahead of the Hong Kong budget this afternoon, the Hang Seng has retreated by 1.70%, and Taiwan is 0.35% lower.
By contrast, more cyclical ASEAN is doing somewhat better. Singapore has rallied 1.35% on a brighter outlook for the city’s banks in 2021, while Kuala Lumpur and Bangkok have risen 0.50%, and Jakarta has posted modest gains. Australian markets, frothy from recent commodity rallies, are in profit-taking mode today as US futures fade in Asia. The ASX 200 has fallen 0.90%, while the All Ordinaries is 0.75% lower.
At the margins, more tech-heavy Asian markets have underperformed today following the Nasdaq price action overnight, rising inflation fears and a vaccine-led recovery reopening offices. By contrast, the much more cyclical-based ASEAN markets have outperformed for precisely the same reasons. The connection is tenuous, though when you add Australia in, and much of the divergence today can be laid at the door of price corrections to the previous week’s market movements’ trajectory.
European stocks are unlikely to gain much of a Powell tailwind, given that his comments merely stopped the rot on Wall Street overnight. Further retreats in the short-term by global equities cannot be ruled out as markets remain fixated on inflation. More progress on the Biden-stimulus could shift that myopic attention to the positive, and in the longer-term, the central bank environment remains supportive for asset price appreciation. Some two-way price action in the here and now though is no bad thing.
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