Market Close May 12

Asian markets ease amid US-China friction

Indonesia CDS outperforms on $10-billion government package; China inflation data sparks rate cut hopes; US-China war of words rattles markets

Asian markets ease amid US-China friction
Representatives from district enterprises show positions that people apply for during an online job fair organisd by local government agencies to boost the economy and reduce unemployment. This was held in Huzhou city in eastern China's Zhejiang province on May 11, 2020. Photo: Tan Yunfeng / Imaginechina via AFP

(ATF) Hong Kong: Asian markets eased after fears of US-China trade tensions reigniting gripped investors – already concerned about the reopening of economies and the risk of a second wave of infections.

US President Donald Trump on Monday ruled out renegotiating the trade agreement signed with China and Chinese media outlets were full of opinion pieces like “China can withstand constant US tricks: Global Times editorial” and “Questions can be asked of US: China Daily editorial”.

Japan’s Nikkei 225 edged down 0.12% and Australia’s S&P ASX 200 fell 1.07%. Hong Kong’s Hang Seng benchmark dropped 1.45% and China’s CSI 300 share index was flat after reporting worse than expected inflation numbers, which sparked hopes of interest rate cuts.

China reported a sharp fall in consumer and producer price inflation, an indication of the challenge that authorities are facing in lifting demand even as they reopen the world’s second biggest economy. China’s factory gate prices fell 3.1% in April compared with 1.5% fall in March. This was faster than the 2.6% expected by analysts polled by Reuters. Consumer price inflation fell to 3.3% from 4.3% in March, compared with a Bloomberg consensus of 3.7%.

“In our view, there could be an additional 20bps MLF rate cut as early as this week, 50-75bps broad-based RRR cut (or equivalent) for rest of this year, and continued implementation of PBoC re-lending to facilitate fiscal easing measures financed by larger government bond issuance in the coming quarter,” Morgan Stanley analysts Robin Xing, Jenny Zheng and Zhipeng Cai said in a note.

The Chinese city of Wuhan reported new infections after it eased the official lockdown, as did South Korea, where a nightclub was the source of new infections. Russia is also reporting a rise in new cases, while many countries in Europe are easing restrictions amid a fall in infections.

Rate cuts

Rate cuts should bode well for increased debt issuance and Standard Chartered tipped an increase in government bond supply, which may exceed 14 trillion yuan this year because of the wider budget deficit and scale of special bond issuance.

“We expect the CGB yield curve to bear-steepen further in the near term on a likely sharp rise in supply and improving high-frequency economic data. In the medium term, we see China rates falling further given subdued growth, ongoing monetary policy easing, declining inflation, and a reduced supply shock,” Standard Chartered Bank strategists Becky Liu and Jeffrey Zhang said in a note.

Credit markets recovered from their morning lows with the Asia IG index trading 1/2 basis points tighter from Monday at 115/118, while sovereign CDS were flat to a basis point wider.

Indonesia was the out-performer with the 5-year contract tightening by 5bps to 199/204 bps on news that the government is readying a $10-billion package for its SOEs.

ATF China Bond 50 Index:

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Foreign Exchange: China in deep deflation, need of monetary easing

Asia Stocks

· Japan’s Nikkei 225 eased 0.12%

· Australia’s S&P ASX 200 dropped 1.07% 

· Hong Kong’s Hang Seng index tumbled 1.45%

· China’s CSI300 closed flat

· The MSCI Asia Pacific ex-Japan index retreated 0.84%.

Stock of the day 

China Resources Gas fell as much as 7.6% after the company said it is placing about 4% of its equity shares at prices below existing market levels.