Markets Jul 09

Economic optimism drives risk rally

China’s smart recovery from the pandemic, with PBoC willingness to ease monetary and credit conditions and the US’s muted response to the security law in Hong Kong cited as reasons for optimism

Economic optimism drives risk rally
An old railway construction worker is interviewed on the first train running on the newly opened Anshun-Liupanshui railway in southwest China's Guizhou province on 8 July 2020. Photo: Hu Zhiqiang / Imaginechina via AFP.

(ATF) Asian markets are firm on Thursday as focus shifted on recovering economies around the region with investors taking the rising infection count in their stride.

China’s inflation data showed producer prices rose last month for the first time since the outbreak of the coronavirus, adding to evidence that industrial demand had mostly recovered by the end of Q2.

Capital Economics economists Julian Evans-Pritchard and Martin Rasmussen said core inflation, which fell to its weakest in a decade, will probably bottom out before long.

“With fiscal stimulus and infrastructure spending still ramping up, we think that economic activity and producer prices are set to recover further in the coming months. On past form, this means that core consumer price inflation should start rising before long, too,” they said in a note.

Overnight, the Nasdaq add 1.44% to another record close, while the Dow Jones Industrial Average rose 0.68% and the S&P 500 gained 0.78%.

China’s mainland index the CSI300 advanced 1.1% rising for the eighth straight day after breaking out above its January 2018 peak. Macro research firm BCA Research said this break out has room to run, which should support the relative performance of EM equities.

It said China’s smart recovery from the pandemic, with PBoC willingness to ease monetary and credit conditions further to arrest any remaining deflationary pressures and the US’s muted response to China’s national security law in Hong Kong were some of the factors behind their optimistic appraisal.

“China’s credit and fiscal impulse will rise higher in the coming quarters, which will lift earnings per share and keep the equity risk premium at bay,” the macro research firm said in a report.

Hong Kong’s Hang Seng index was up 0.47%, Japan’s Nikkei 225 is 0.95% higher and Australia’s S&P ASX 200 benchmark has advanced 1.21%.

Investors have taken the rise in infections in the US – where coronavirus cases jumped by a single day record of 62,000 on Wednesday – in their stride.

Asian credit markets also joined the risk rally with the Asia IG index shrinking by 2 basis points to 78.5/79.5 with sovereign CDS moving in by 1-2 basis points.

New issues continue to flow with bond offerings from Yankuang GroupHangzhou FinanceThailand's PTTZhongAn Online and Shandong Energy.