Asian markets tumble on China's interest rate cut

August 15, 2023 (MLN): Asian stock markets wallowed at one-month lows on Tuesday and the yuan struggled as China cut interest rates as another round of disappointing data underscored its economic malaise, as Reuters reported.

Cuts to China's one-year loans to financial institutions, at 15 basis points, were the largest since the outset of the COVID pandemic. Industrial output and retail sales growth both slowed from a month earlier to a year-on-year pace of 3.7% and 2.5% respectively, missing expectations.

The yuan dropped to its lowest in 9-1/2 months, and sources told Reuters that China's major state-owned banks stepped into the spot market to steady the currency. After that, it hit 7.2743 per dollar, having been as low as 7.2875.

MSCI's broadest index of Asia-Pacific shares outside Japan edged down 0.1% to 509.12, not far from a one-month low on Monday of 506.3 as worry about China's frozen property sector swept across regional markets.

Property investment, sales and fundraising extended their slide in July, the data on Tuesday showed. New construction starts by floor area are down nearly 25% year-on-year and highlight how there is neither the appetite nor funds to build or buy.

"We reckon that markets still underestimate the aftermath of the significant collapse in China’s property sector, which accounts for more than half of global new home sales," said analysts at Japanese bank Nomura.

"The chain reaction triggered by slumping new home sales may lead to a rising number of developers' defaults, a sharp contraction of government revenue, falling demand for construction materials, declining wages, weaker consumption, and faltering financial institutions," he added.

Hong Kong's Hang Seng fell 0.8% to within a whisker of Monday's one-month low. Chinese blue chips fell 0.2%.

Chinese government bonds rallied, driving 10-year and five-year yields to their lowest since 2020 at 2.56% and 2.35%, respectively. With U.S. yields rising, the gap over Chinese yields at the 10-year tenor hit its widest in 16 years at 168.8 bps.

Shares in under-pressure developer Country Garden bounced 5% to HK$0.83. The once-sound developer is struggling to make debt repayments and its woes are a chilling signal for the broader market. In January 2020 the shares traded at HK$13.

Contagion concerns grew as Zhongrong International Trust Co, a major trust company traditionally exposed to real estate, missed repayment obligations on some investment products.

J.P. Morgan analysts warned of a "vicious cycle" of real estate financing challenges and said trust defaults could wipe 0.3% to 0.4% from China's growth directly.

Japan GDP jumps

China's weak data overshadowed a surprise in Japan, where tourism and car exports sent annualized growth surging to 6% in the second quarter, well above the 3.1% analysts had expected. That lifted the Nikkei by 0.8%.

"The export news was heartening and bodes well for Japan’s continued trade competitiveness," said John Vail, chief global strategist at Nikko Asset Management in Tokyo, though he cautioned that domestic consumption indicators were soft.

The yuan's woes, however, kept the U.S. dollar pretty firm and the yen showed little reaction.

The yen hit a nine-month low of 145.60 to the dollar, capped as controlled Japanese yields leave a wide gap on rising U.S. yields.

In Australia, wage growth came in steady for the last quarter, just below expectations, and added to the case for a pause in interest rate hikes for the time being.

The Aussie dollar and the Kiwi held steady just above major support levels.

The euro recovered slightly from overnight losses to $1.0909.

Wall Street indexes rose on Monday, led by tech shares and especially chipmaker Nvidia, which jumped 7.1% after Morgan Stanley analysts called it a "top pick".

Nasdaq 100 futures were up 0.2% in the Asia session.

The S&P 500 rose 0.6% overnight and futures rose 0.1% in Asia. European futures rose 0.4%.

In bond markets, benchmark 10-year Treasury yields rose 2 basis points to 4.20% on Tuesday. Two-year yields were steady at 4.97%.

Brent crude futures were steady at $86.30 a barrel.

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