Markets Jul 17

Investors monitor US-China tensions but undertone firm

Asian markets in a lull after recent gains and tech sector weakness in US

Investors monitor US-China tensions but undertone firm
Fans of Apple products visit the new Apple Sanlitun on Friday July 17, 2020 – the latest version of Apple’s first store in China. It sits adjacent to the previous location on Taikoo Li’s open square in Sanlitun, Beijing. Photo: Str / ImagineChina via AFP.

(ATF) Asian markets took a breather after recent gains as investors monitored the US-China tensions, following the proposed US travel bans on Chinese Communist Party members and Beijing's angry response at the “pathetic” plan.

Weakness in the tech sector contributed to Wall Street’s decline overnight, but it could well be a pause as economic recovery has begun to take root.

“But if there really was no fundamental reason for stocks' weakness yesterday, then stocks may simply be running out of momentum. Honestly, sometimes the only reason markets fall is because they stop going up,” Robert Carnell, ING Bank’s regional head of research in the Asia-Pacific, said.

“This may indicate nothing more than a short pause for repositioning, or minor correction before the next upward leg,” Carnell said.

Japan’s Nikkei 225 is down 0.33%, China’s CSI300 benchmark has retreated 0.3% and Australia’s S&P ASX 200 is flat. Hong Kong’s Hang Seng index is outperforming with a gain of 0.6% as the market recovered from the setback following the Hong Kong Autonomy Act signed by US President Trump earlier this week.

“The spectrum of possibilities is still very wide but extreme scenarios are probably to be ruled out in the short run,” Natixis' chief Asia Pacific economist Alicia Garcia Herrero said, referring to the US and China's strategic competition and decoupling following the passage of the law.

“The immediate impact for Hong Kong should be limited but with growing uncertainties in the medium term.”

Markets flat in US

Overnight, weakness around the technology sector following disappointing Netflix earnings weighed on Wall Street.

The Dow Jones Industrial Average fell 0.5%, the S&P 500 lost 0.34% and the Nasdaq Composite dropped 0.73%.

Investors like Pictet Asset Management have taken profits following the recent rally. “We took some profit in select US tech leaders, and reduced risk going into earnings season as some names have run ahead into near-term overbought territories,” they said. “But we maintain long-term strategic allocation in these 'asset classes'. So should investors.”

Broadly, investors and analysts are optimistic about risk assets. BCA Research analysts said investor nervousness would be short-lived and stocks will resume their uptrend as there is no political will to rescind fiscal stimulus.

“Investors should remain overweight in global equities, while tilting their exposure to beaten-down cyclically-geared stocks and non-US markets. The equity bull market will only end when central banks get panicky about rising inflation, which is unlikely to happen for the next three years,” they said in a note.

Credit markets are trading with a firm bias with the Asian IG index moving in by a basis point at 77/78 bps.