Asia at Epicenter of Market Fears as China Easing Stokes Concern
(Bloomberg) -- Asia is emerging as the epicenter for investor worries over global growth and the spread of coronavirus variants.
While their peers in the U.S. and Europe remain near record highs, Asian stocks have fallen back in recent months amid slowing Chinese economic growth and a glacial rollout of vaccines. The trend accelerated Friday with the benchmark MSCI Asia Pacific Index briefly erasing year-to-date gains for the second time in as many months, while Chinese authorities moved to boost lending to help the economy.
“Asia was seen as the poster child in pandemic response last year, but this year the slow vaccination rollout in most countries combined with the arrival of the delta variant means another lost year,” said Mark Matthews, head of Asia research with Bank Julius Baer & Co. in Singapore. “I suspect Asia will continue to lag as long as vaccination rollouts remain at their relatively sluggish levels and high daily new Covid counts prevent them from lifting mobility restrictions.”
In a sign that Asia’s growth is facing challenges, China’s policymakers cut the reserve requirement ratio for most banks on Friday, unleashing about 1 trillion yuan ($154 billion) of long-term liquidity into the economy from July 15.
China had surprised investors earlier this week when it signaled a potential cut. The timing and magnitude of the move, coming a week before second-quarter growth data, suggests growing concerns about the economic outlook, analysts said.
“Even though the central bank said the cut shouldn’t be seen as a sign it’s shifting its policy stance, the market will interpret the move as a tilt toward looser monetary policy in the second half,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc in Hong Kong.
A fresh regulatory crackdown on Chinese tech stocks this week has also impacted investor sentiment in the region. The Hang Seng China Enterprises Index fell briefly into a technical bear market Friday, led by weakness in the sector.
While Asia bore the brunt of the retreat in global equities, havens in other asset classes from Treasuries to the yen have rallied, and the rotation toward economically-sensitive cyclical stocks from their high-priced growth counterparts continued to unwind.
“It’s a sign of how challenging the reopening process is,” Marvin Loh, State Street senior global market strategist, said in an interview with Bloomberg TV. “What the PBOC is going through as well as these variants that keep popping up around the world shows it’s going to be an uneven process. Maybe a normalization tightening policy is not necessarily going to be as fluid.”
Covid 19 remains a key challenge. In Japan, Tokyo has declared a renewed state of emergency to combat the resurgent virus, banning spectators from the Olympics and pushing the Nikkei 225 Stock Average toward a correction. South Korea is intensifying social distancing measures in Seoul while Indonesia is battling a virus resurgence that has crippled its health system.
“Asian equities are being particularly impacted by the rebound in coronavirus cases in the region, fears about the impact of that on regional growth and concern that we may now have seen the best of the rebound globally,” said Shane Oliver, head of investment strategy with AMP Capital Investors in Sydney. “Asian shares may have led the way on this but coronavirus concerns may also weigh on global shares generally.”
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