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Asia stocks fall as traders trim risks before Fed: markets wrap

Asia stocks fall as traders trim risks before Fed: markets wrap
An electronic stock board displaying a graph of the Nikkei 225 Stock Average's movements outside a securities firm in Tokyo, Japan, on Thursday, 1 June 2023. (Photo: Kiyoshi Ota/Bloomberg)

Stocks in Asia fell as investors trimmed their positions to reduce risks ahead of the Federal Reserve’s rate decision with Chinese equity markets giving up some of Tuesday’s gains.

Hong Kong stocks declined, with technology shares falling over 1%. Equities were also lower in Japan and South Korea. Australian stocks advanced after quarterly inflation came in slower than expected.

While Chinese assets rallied following the Politburo meeting on Monday, investors continue to wait for Beijing to deliver more tangible support for the economy amid concern that debt and demographics constraints will weigh on growth. 

Imminent follow-through of actionable policy measures, especially those for the property sector, will be key to sustaining a China market rally, according to Morgan Stanley strategists. 

Meanwhile, more explanation of planned property policies, particularly those affecting prices in first top-tier cities, will be crucial to restore confidence among investors, said Winnie Wu, China equity strategist at Bank of America, on Bloomberg Television. “That will be the key message to deliver to the home buyers because if property price goes down, it’s very hard to convince people to buy a depreciating asset.”

The S&P 500 closed on Tuesday at its highest since April 2022, the Nasdaq 100 outperformed and the Dow Jones Industrial Average saw its 12th straight advance — the longest winning run in over six years — as the Conference Board’s US consumer confidence index climbed to a two-year high. Big tech led equity gains, with traders counting on the earnings season to see whether the enthusiasm around artificial intelligence will justify this year’s market advance.

The Australian dollar declined as inflation data strengthened bets for the nation’s central bank to pause interest rate hikes again next week. The greenback inched up, while yields on the two-year Treasury, which are more sensitive to imminent Fed moves, were mostly unchanged. 

In the approach to the Fed’s decision, strong consumer confidence data bolstered the soft-landing narrative for the US economy — while suggesting policy makers aren’t done with their inflation fight yet. Rates on swap contracts continued to price in a quarter percentage-point Fed hike later on Wednesday, with an additional 12.5 basis point increase factored in by year-end. That indicates a 50% likelihood of another quarter-point move.

The front-end rates may decline significantly if Fed chairman Jerome Powell even subtly acknowledges that inflation is now less of a problem, strategists at DBS Bank Ltd. in Singapore, including Eugene Leow, wrote in a note. “If there are any hints that inflation is going in the right direction or that the inflation rate is near target, it could easily be interpreted dovish,” they said.

Earnings tests

In late trading in the US, a $210-billion exchange-traded fund tracking the Nasdaq 100 climbed as Google’s parent Alphabet Inc. reported revenue that beat analysts’ expectations. Microsoft Corp. posted tepid sales growth, while Texas Instruments Inc. gave a lukewarm forecast.

There are so many bulls in the US stock market that any disappointment on the economy or earnings poses a risk to the rally, according to Citigroup Inc. strategists. Investor exposure to the S&P 500 remains extended and one-sided, even after bullish momentum has waned in recent weeks, a team including Chris Montagu said.

Given that Wall Street had set a low bar coming into the reporting season, roughly 80% of the companies have thus far beaten profit estimates, according to data compiled by Bloomberg.

Meanwhile in commodities, oil slipped on Wednesday after recent gains amid tighter supplies and optimism that China’s government will boost the country’s economy. Gold was little changed. DM

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