19-7-2023 (SINGAPORE) As Wall Street continues to surge, driven by factors such as the nearing end of the Federal Reserve’s rate-hiking cycle, a weakening dollar, and strong earnings, the impact does not seem to be resonating strongly in Asian markets.
In fact, the disconnect between Asia and the rest of the world has grown wider recently, with correlations between the MSCI Asia ex-Japan index and leading U.S. and global indexes reaching their weakest levels in about a month.
While some of the largest U.S. banks and financial firms reported solid second-quarter earnings on Tuesday, bolstering the U.S. stock market, it remains to be seen whether this momentum will translate into local Asian trading on Wednesday.
There is certainly room for Asian markets to catch up. The MSCI Asia equity index ex-Japan has only risen by 4.6% this year, significantly underperforming the MSCI World index, S&P 500, and Nasdaq, which have seen gains of 17%, 19%, and 38% respectively.
Although U.S. retail sales figures for June were weaker than expected, concerns about the health of the economy were overshadowed by strong earnings reports from Bank of America, Bank of New York Mellon, and other financial institutions.
China continues to be a major drag on Asian markets. Disappointing second-quarter growth figures this week have pushed China’s economic surprises index to its lowest level in over three years. Excluding the pandemic, the index is at its lowest since 2015, just before Beijing’s surprise mini yuan devaluation.
China’s sluggishness has raised the possibility that the country may be entering an era of much slower economic growth and may never achieve its goal of becoming a wealthy nation. Whether it manages to maintain a modest annual growth rate of 3% to 4% or experiences Japan-like “lost decades” of stagnation, it is poised to disappoint its leaders, its youth, and the global community.
In the near term, the entire spectrum of U.S.-China tensions has come back into focus for investors, including climate, defense and security, and semiconductors and technology. U.S. climate envoy John Kerry is currently on a three-day visit to Beijing, China’s defense minister Li Shangfu met with veteran U.S. diplomat Henry Kissinger, and U.S. chip company executives held discussions with top officials from the Biden administration regarding China policy.
Meanwhile, in Thailand, parliament is set to convene on Wednesday to select a new prime minister. Pita Limjaroenrat, who led the Move Forward party to victory in May’s election, failed to secure the necessary support of over half of the legislature last week.
Ahead of the vote, the Thai baht experienced a significant surge on Tuesday, strengthening 1.6% against the dollar to reach a two-month high. It marked the currency’s best performance since November.
Key developments that could shape market direction on Wednesday include the Thai parliament’s prime ministerial election, New Zealand’s inflation data for the second quarter, and the release of UK inflation figures for June.
