Asian markets fall on China's deflation risks

July 10, 2023 (MLN): Asian markets slipped with risk appetite dented by deflation risks in China as Bloomberg reported.

Asia equity benchmark fell, headed for the lowest close in more than a month. Shares in Hong and mainland China pared gains after Chinese data showed further declines in factory-gate prices while core inflation slowed. The dollar gained against most Asian currencies, with the offshore yuan swinging to a loss after the report.

• Japan’s Topix index fell 0.7%
• Hong Kong’s Hang Seng Index rose 0.8%
• Chinaa’s Shanghai Composite Index rose 0.8%
• Australia’s S&P/ASX 200 Index fell 0.5%
• Euro Stoxx 50 futures were little changed
• S&P 500 futures fell 0.3% as of 1:07 p.m. Tokyo time. The S&P 500 fell 0.3% on Friday
• Nasdaq 100 futures fell 0.4%. The Nasdaq 100 fell 0.4%

Traders had initially focused on signs that a Beijing crackdown on Chinese tech companies was nearing an end, sending the Hang Seng Tech Index up as much as 3.2%, before getting weighed down by the outlook for the world’s second-largest economy. 

“It is clear that China is facing excess supply now,” said Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group Ltd. “Demand side policies will be in need,” with focus now shifting to expectations of fiscal stimulus before China’s July Politburo meeting, he said.

US stock futures slipped further after most American equities dropped Friday when wage data showed inflation remained a threat. The S&P 500 fell 1.2% over the holiday-shortened week, while the Nasdaq 100 dropped 0.9%.

Despite the current economic downturn, some investors still see China as a prospective market. Chinese authorities said on Friday they would wrap up a probe into Ant Group Co., with the financial technology company paying a fine of almost $1 billion, to suggest that a broader regulatory crackdown is ending.

“China is cheap,” and its current transition to lower growth “is well understood by the market,” Shaun Cochran, head of research at CLSA, said on Bloomberg Television. “China can deliver reasonable returns. It doesn’t have to lead the cycle. The next cycle is about transition.”

The dollar edged higher against all of its Group-of-10 currencies. The yen fell 0.5%, while Japanese stocks led losses in the region. Treasury yields were little changed, with the two-year remaining below 5% and the 10-year just above 4%.

Meanwhile, investors continue to face a host of competing forces, including the risk of higher interest rates and recession.

Some jobs reports last week have tamped down speculation the Federal Reserve would leave interest rates unchanged later this month. The outlook beyond that was unclear. Government jobs data fell short of estimates but brought signs that wage inflation remained a threat to the Fed’s fight against price gains.

Inflation Data

Traders will also be closely watching this week’s US consumer price print. Reports from big banks including Citigroup Inc. and JPMorgan Chase & Co. may also set the tone for second-quarter earnings.

Downside surprises in this week’s inflation indicators could charge up the bulls, taking the S&P 500 above the bull market’s channel, according to Ed Yardeni, president of his namesake research firm. “On the other hand, higher-than-expected inflation readings could heighten fears that the Fed will have to tighten monetary policy to cause a recession as the only clear way to bring inflation down.”

US Treasury Secretary Janet Yellen said over the weekend she wouldn’t rule out the threat of a US recession, noting that it was “appropriate and normal” for growth to moderate and that inflation remains too high.

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