Asian shares hit seven-week lows on extended sell-off

by Jonathan Adams
KOSPI

MSCI’s broadest index of Asia-Pacific shares outside Japan tumbled 1.5%, China’s blue-chip share index was off 0.3%, Australian stocks slid 0.6%, KOSPI index dropped 0.7%, and Taiwan’s benchmark index tumbled 6%

An extended sell-off drove Asian shares to their lowest in seven weeks on Wednesday as surging commodity prices and growing inflationary pressure in the United States prompted markets to bet on earlier rate hikes and higher bond yields globally.

MSCI’s broadest index of Asia-Pacific shares outside Japan tumbled 1.5%, adding to Tuesday’s 1.6% decline with all major indices under heavy selling pressure.

Analysts said a combination of inflation fears and some investors cutting their exposure to over-stretched stocks or sectors was behind the recent downturn.

At 682 points, the regional index is not too far from a record high of 745.89 reached in February and is still up 3% this year so far, on top of a 19% jump in 2020 and a near 16% rise in 2019.

China’s blue-chip share index was off 0.3%.

Australian stocks slid 0.6% while South Korea’s KOSPI index dropped 0.7%. Japan’s Nikkei reversed early gains to be down 0.4%.

Taiwan’s benchmark index tumbled 6% from all-time highs to levels seen in February on concerns it may raise its pandemic alert level in coming days, which would lead to closure of shops dealing in non-essential items as cases rise.

Analysts, however, doubted the broader equities sell-off would extend much further in a world of easy accommodative policy and fiscal largesse.

Despite the severity of the moves, we sensed limited panic in our client conversations with many using the weakness as an opportunity to buy the dip, particularly in the value orientated areas e.g. banks, energy and insurance, JPMorgan analysts wrote in a note.

Overnight on Wall Street, technology stocks were among the biggest losers though the tech-focused Nasdaq reversed the bulk of its early 2% decline over the course of the day. The Dow fell 1.4% and the S&P 500 dropped 0.9%.

The equity rout barely helped drive any safe haven flows into the greenback even as futures pointed to yet another negative open for Wall Street. E-mini futures for the S&P 500 tumbled 0.7% while futures for the tech-heavy Nasdaq fell 0.9%.

What is unusual about the last two days is that the equity-market angst did not provide the U.S. dollar with a notable lift, said Alvin T. Tan, head of Asia FX strategy at RBC Capital Markets.

Tan said there was no sign of “risk-off” among regional currencies either with the high-carry Indian rupees and Indonesia rupiah largely holding their ground.

Still, it is not yet obvious if this signifies a new market paradigm. As they say, one swallow does not make a summer, Tan added.

All eyes are now on the U.S. consumer price index report to be released by the U.S. Labor Department on Wednesday with market-based measures of inflation expectations having moved higher .

Prices are definitely on the increase and this is evident across a wide range of sectors and geographies. What is less clear is the longevity of the increase in prices, ANZ analysts wrote in a note.

Treasury yields have remained stuck to a tight range. The yield on benchmark 10-year Treasuries drifted lower to 1.6217%, far from the 2% level seen in before the pandemic.

The U.S. Federal Reserve expects higher inflation though officials have pointed to transient factors and base effect for the temporary rise.

The upshot is the Fed remains far away from achieving its aim of average inflation of 2% per year. The Fed’s ultra-accommodative monetary policy is part of the reason why we consider the USD downtrend is intact, said Commonwealth Bank of Australia analyst Carol Kong.



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