Asian Stocks Hit 2-1/2-Year Lows, Rishi Sunak‘s Win Helps Pound
SG – Singapore Asian markets dropped to new 2-1/2-year lows on Tuesday as weakness in Chinese shares and the yuan overshadowed early gains sparked by a Wall Street rally on hopes the Federal Reserve may be about to cease its aggressive rate rises.
After Rishi Sunak was announced as the future prime minister of Britain, the U.S. dollar weakened against its major counterparts as the sterling aimed for this month’s highs in an effort to bring stability to a nation reeling from years of political and economic unrest.
The pound gained 0.3 percent to $1.13170, moving closer to the month’s high of $1.1493 set on October 5.
Equities in Asia were mixed, with South Korea up 0.3 percent and Japan up 0.7 percent but Taiwan down 0.7 percent, and Hong Kong down 0.6 percent.
MSCI’s largest index of Asian shares fell 0.4 percent to 428.2 from 427.4, which was its lowest level since April 2020.
The Purchasing Managers’ Index (PMI), which was published on Monday across the developed countries, showed a broad weakening, according to ING economists. However, they said, “Perhaps the precipitous drop in the U.S. service sector PMI is a silver lining in this dismal news if it predicts slower Fed hikes and perhaps a lower peak Fed funds rate?”
They continued, “This may be one factor contributing to the boost equity markets are receiving.”
While emerging markets like India and Indonesia have gained due to stronger economic forecasts, the Asian benchmark is suffering losses of close to 32% so far this year. This is mostly due to significant declines in Hong Kong shares.
However, after Xi Jinping’s new leadership team stoked concerns that a more potent Party leadership will more prioritize the state at the expense of the private sector, Chinese markets sank even further on Tuesday.
The offshore yuan fell to another new low versus the dollar, dropping to as much as 7.3650 per dollar, while the benchmark index for mainland China lost 0.6 points.
Delayed GDP data that showed the Chinese economy expanded by 3.9 percent in the third quarter, exceeding expectations of 3.5 percent, but retail sales disappointed with a modest increase of 2.5 percent, had already had an impact on sentiment.
Following the sell-off in Chinese assets on Monday, the central bank set the lowest mid-point since 2008. As a result, the onshore yuan of China fell to a level that was over 15 years low.
As signals of a slowing U.S. economy fuelled optimism that the Federal Reserve may pause its pace of rate hikes, U.S. shares extended their gain from the previous week on Monday, and European shares rose as well. The S&P 500 increased by 1.19 percent, the Nasdaq Composite by 0.86 percent, and the Dow Jones Industrial Average increased by 1.34 percent.
In October, U.S. business activity declined for the fourth consecutive month, demonstrating that the Fed’s relentless hike in interest rates is having the expected impact. Markets have reduced their bets on a matching move in December, but they are still pricing in a rate increase of 75 basis points for next month.
According to 49 out of 80 economists surveyed by Reuters, the fund’s rate would peak at 4.50 percent to 4.75 percent or higher in the first quarter of 2023.
This week’s European Central Bank meeting is anticipated to result in a rate increase of 75 basis points. The price of gold increased on the commodities markets by 0.1 percent to $1,650.6 per ounce, while the price of benchmark Brent crude futures remained stable at $93.2 per barrel.