Asian equities rallied on Thursday with investors lifted by recovery hopes for China’s Covid-hit economy now that Beijing has rolled back its strict curbs.
But those gains were capped by the hawkish tone of the US Federal Reserve which warned against betting too heavily on rate cuts this year.
Japan’s Nikkei share average rebounded from a three-month low as its chip-related stocks rallied in line with US peers, but the gains were limited by fears global central banks are no closer to easing back on inflation-busting interest rate hikes.
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The Nikkei ended the day up after dipping to a three month-low the day before. The index edged up 0.40%, or 103.94 points to end at 25,820.80, while the broader Topix index gained 0.04%, or 0.75 points, to 1,868.90.
Those Wall Street gains came despite the minutes of the Federal Reserve’s December meeting showing policymakers remained committed to controlling inflation even though they agreed on slowing the pace of interest rate increases.
Japanese and global markets are also still feeling the impact of the Bank of Japan’s shock widening of the band it allows the 10-year government bond yield to move in around the zero mark.
Across the East China Sea, the shockwave from Beijing’s abrupt dropping of its ultra-strict Covid curbs on travel and activity, is still reverberating with the virus now unleashed on the nation’s 1.4 billion people.
Many funeral homes and hospitals say they are overwhelmed but investors hope that once the infection waves pass, life and spending can return to normal and are looking beyond the most immediate difficulties.
“China reopening has a big impact … worldwide,” said Joanne Goh, an investment strategist at DBS Bank in Singapore, since it not only spurs tourism and consumption but can ease some of the supply-chain crunches seen during 2022.
“There will be hiccups on the way,” Goh said, during an outlook presentation to reporters. “We give it six months adjusting to the process. But we don’t think it’s reversible.”
US Fed Reserve Caution
China’s central bank also said overnight it will step up financing support to spur domestic consumption and key investment projects and support a stable real estate market.
E-commerce and consumer stocks were among the biggest gainers in Hong Kong, which touched a six-month high. Reopening hopes have also driven China’s yuan to four-month highs and supported regional stocks and currencies.
Hong Kong’s benchmark Hang Seng Index rose 1.25%, or 259.06 points, to 21,052.17.
The Shanghai Composite Index advanced 1.01%, or 31.70 points, to 3,155.22, while the Shenzhen Composite Index on China’s second exchange rallied 2.13%, or 236.64 points, to 11,332.01.
Indian stocks dropped, though, with Mumbai’s signature Nifty 50 index down 0.24%, or 42.75 points, at 18,000.20.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1% to touch a four-month high at one stage, before paring gains.
Asia’s mild optimism came despite minutes from the Federal Reserve’s December meeting, published on Wednesday, containing caution against the late-year rate cuts traders have priced in.
Fed committee members noted that “unwarranted easing in financial conditions” would complicate efforts to restore price stability, the minutes showed.
“Translating Fed speak, this is a warning to markets, that being too optimistic may ironically backfire,” said Vishnu Varathan, Mizuho Bank’s head of economics in Singapore.
Treasuries Hold Gains
Fed funds futures pricing shows traders think the benchmark US interest rate will peak just below 5% in May or June, before being cut back a little bit in the second half of 2023.
Treasuries hung on to recent gains, with 10-year yields down 11 basis points this week to 3.72%. Yields fall when prices rise.
In currency markets, the dollar has been wobbly as investors navigate between the Fed’s hawkish tone and the support for riskier currencies driven by China’s reopening.
The yen was steady at 132.56 per dollar, supported by wagers that Japan’s ultra-easy monetary policy will be finally tightened this year.
Oil sounded the loudest note of caution, falling sharply overnight on worries that the near-term outlook is precarious in China and that a global slowdown will hurt demand.
Brent crude futures steadied at $78.79 a barrel on Thursday after dropping 1.5% on Wednesday.
Key figures
Tokyo – Nikkei 225 > UP 0.40% at 25,820.80 (close)
Hong Kong – Hang Seng Index > UP 1.25% at 21,052.17 (close)
Shanghai – Composite > UP 1.01% at 3,155.22 (close)
London – FTSE 100 > UP 0.38% at 7,613.77 (0935 GMT)
New York – Dow > UP 0.40% at 33,269.77 (Wednesday close)
- Reuters with additional editing by Sean O’Meara
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