Markets Jul 23

US-China tensions curb risk appetite

Uncertainty also over next US stimulus package; South Korean economy contracted 3.3% in the second quarter 

US-China tensions curb risk appetite
National Nurses United displays 164 pairs of white shoes at the Capitol building in Washington on July 21, 2020, in honor of the nurses who lost their lives while serving victims of the coronavirus. Photo: Olivier Douliery/ AFP.  

(ATF) Asian markets are trading with a subdued undertone amid an escalation in Sino-US tensions and uncertainty around the next round of stimulus measures in the United States.

Chinese equities are underperforming as a result, as are markets in South Korea after the economy contracted by more than expected in the second quarter, taking Asia’s fourth largest economy into a technical recession.

Beijing said it will make a proper and necessary response to Washington’s closure of the Consulate General in Houston unless it “immediately revokes the wrong decision”.

This follows after the United States ordered China to close its consulate in Houston, saying it was "to protect American intellectual property and Americans' private information."

Japan’s Nikkei 225 benchmark slipped 0.5%, Australia’s S&P ASX 200 is off 0.2% and the Hang Seng index is 0.16% lower. But mainland China’s CSI300 index has tumbled 2.1% and South Korea’s Kospi index has fallen 1%.

South Korea's Q2 contraction

Bank of Korea reported the South Korean economy contracted 3.3% in the second quarter. This is worse than the market consensus of -2.4% and investors are worried about a lack of policy response.

“The Bank of Korea has highlighted fairly clearly that it is done with easing, amid rising concern once more over house prices,” said Robert Carnell, ING Bank’s Regional Head of Research for the Asia-Pacific.

“And the government has also put in place a lot of fiscal stimulus - three supplementary budgets so far this year, so there probably won't be any more from them for a while either.”

This is in contrast with China, Asia’s biggest economy, which has plenty of options to revive growth after it reported a better than expected second quarter expansion.

UBS economists on Thursday upgraded China's 2020 GDP growth forecast from 1.5% previously to 2.5% after the outperformance.

“We expect macro policies to remain supportive in H2 as economic activities have not fully returned to pre-Covid-19 levels even after the strong Q2 rebound and job market pressure persists and growth uncertainty lingers,” they said in a note.

UBS expects fiscal support to continue via infrastructure spending and monetary support via enhanced credit supply.

Overnight, Wall Street clung on to gains on optimism about another stimulus package. The Dow Jones Industrial Average added 0.62%, the S&P 500 climbed 0.57% and the Nasdaq Composite advanced 0.24%.

Credit markets are trading firm this morning with the Asia IG index one basis point tighter at 74/75 bps and sovereign CDS moving in by 1-3 basis points. Manila WaterHuzhou City, and Mirae Asset Daewoo are in the market with bond offerings as investors seek yield.