9-8-2023 (SYDNEY) Asian shares faced a defensive stance on Wednesday following the release of data revealing that China has slipped into deflation in July. This development is seen as a negative sign for the global growth outlook, although it may serve as a dampener on global inflationary pressures.
European futures, on the other hand, displayed a positive trend across the board. EUROSTOXX 50 futures rose by 0.8%, while FTSE futures saw a 0.5% increase. Italy also announced that its new tax on banks would not exceed 0.1% of total assets.
After experiencing a 1.2% decline the previous day, the MSCI’s broadest index of Asia-Pacific shares outside Japan managed to edge up by 0.4%. However, Japan’s Nikkei slipped by 0.4%.
The closely monitored China data released on Wednesday revealed a 0.3% decrease in consumer prices in July compared to the previous year. This marks the first decline since February 2021, although it slightly surpassed the forecasted 0.4% drop. Producer prices, on the other hand, fell for the tenth consecutive month.
These figures follow disappointing trade data released the day before, which raised concerns about the global economic outlook.
China’s blue-chip stocks experienced a 0.2% decline, while Hong Kong’s Hang Seng index managed to reverse earlier losses and rose by 0.2%. China’s onshore yuan stabilized at 7.2143 per dollar, moving away from a three-week low.
Chinese property developers listed in Hong Kong dropped by 0.4% after experiencing a 4.8% plunge the previous day. Worries continue to persist about the sector, which serves as a major pillar of economic growth.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, commented on the situation, stating, “I would say it is still a very soft report, underscoring the just very weak domestic demand in the Chinese economy … and I don’t think that’s going to disappear any time soon.” Kong also expressed her belief that the Chinese government will need to implement further policy stimulus to counter deflation risks.
Kong added that fading base effects and government policy support suggested that deflation would likely be short-lived, but consumer demand remains weak.
Chetan Ahya, chief Asia economist at Morgan Stanley, stated, “As things stand, policymakers are finally taking up policy easing, and we believe that these efforts will be sustained until there are clear signs of improvement in aggregate demand.” However, Ahya also emphasized the importance of avoiding premature tightening of policies at the early stages of recovery, as it could increase the risk of falling into a debt-deflation loop.
Brazil is also experiencing disinflationary forces, with consumer prices falling more than anticipated in mid-July. As a result, the central bank of Brazil reduced interest rates by 50 basis points last week.
In overnight trading, Wall Street experienced a broad sell-off following the downgrade of several lenders by Moody’s, reigniting concerns about the health of U.S. banks and the economy. The Dow fell by 0.5%, the S&P 500 lost 0.4%, and the Nasdaq Composite dropped by 0.8%.
On Tuesday, the Italian government surprised the markets by announcing a one-off 40% tax on bank profits resulting from higher interest rates, leading to a 3.5% decline in regional banking shares. However, the government later clarified that the new tax would not exceed 0.1% of total assets.
During Asian trading hours, longer-term Treasury yields slipped further following solid interest in the $42 billion sale of three-year notes. 10-year yields decreased by 2 basis points to 4.004%, after falling by 5 basis points overnight to as low as 3.9840%, reaching a one-week trough.
The two-year yield, which is sensitive to interest rate changes, eased by 1 basis point after remaining largely flat during the previous session.
Investors are eagerly awaiting the U.S. inflation report scheduled for release on Thursday. The report is expected to show a slight increase in headline inflation to an annual pace of 3.3% in July, while the core rate is anticipated to remain unchanged at 4.8%.
The U.S. dollar maintained its gains at 102.49 against a basket of currencies, having risen by 0.5% overnight due to safe-haven demand.
The Australian dollar, which is sensitive to risk, fell below a key support level overnight but managed to rebound to $0.6536.
In other markets, oil prices experienced a marginal decrease. Brent crude futures eased by 0.2% to $86.02 per barrel, while U.S. West Texas Intermediate crude futures fell by 0.2% to $82.73.
The price of gold saw a slight increase, reaching $1,927.67 per ounce.
