Asia shares drop from three-month high on inflation concerns

by Jonathan Adams
Asia shares

MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.3%, Nikkei gained 0.4%, Australian shares jumped to all-time highs, Chinese shares were marginally softer

Asian shares were a touch below a recent three-month high on Thursday with China a tad weaker as investors weighed inflation concerns ahead of key U.S. economic data while oil prices rose to near 1-1/2 year highs.

MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.3% to 711 points. It reached 712.57 on Wednesday, a level not seen since early March.

Japan’s Nikkei gained 0.4%. Australian shares jumped to all-time highs as investors cheered stronger-than-expected economic growth data released on Wednesday.

Chinese shares were marginally softer.

While broader stock markets remain near record highs, the momentum seen earlier in the year has ebbed as investors begin to worry a stronger-than-expected rebound from COVID-19 means higher inflation and sooner-than-expected monetary policy tightening.

A weekly unemployment report and May private payrolls data on Thursday will be followed by monthly jobs numbers on Friday, with investors looking for signs of an economic rebound and rising inflation.

Adding to inflation concerns, oil prices hit the highest level in 1-1/2 years led by a decision by major producing nations to restore supply only.

The U.S. Federal Reserve published its Beige Book report, which pointed to labour shortages and inflation pressures.

Investment managers too are becoming increasingly concerned with BlackRock Founder Larry Fink the latest to warn that the market was underestimating the risk of higher inflation.

Philadelphia Fed Bank President Patrick Harker also restated his call that it may be time to at least think about tapering our $120 billion in monthly Treasury bond and mortgage-backed securities purchases.

The Fed has already announced it would begin unwinding the corporate bond holdings it acquired last year to calm credit markets at the peak of the pandemic.

In Australia, the central bank too is expected to begin tapering its pandemic emergency stimulus from next month when investors believe it would announce not extending its three-year yield target beyond the April 2024 bond.

Wall Street’s main indexes ended Wednesday’s session mixed despite a rally in theatre chain operator AMC Entertainment Holdings AMC.N, which nearly doubled in price on Wednesday, lifting a group of stocks favoured by retail investors on forums such as Reddit’s WallStreetBets.

Frothiness it seems is there, particularly on the retail side, which may be part of the caution being seen in the wider stock market ahead of Non-farm Payrolls on Friday, said Tapas Strickland, economist at National Australia Bank.

The surge in retail stocks comes as investors remain unconvinced by central bank assurances that the current inflation upsurge is transitory.

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