Asia shares ebb into the red as inflation, earnings loom large

SYDNEY: Asian shares slipped into the red on Monday as Chinese stocks extended their recent retreat, and investors braced for U.S. inflation data and a corporate reporting season where robust results are needed to justify high valuations.

Geopolitical tensions were also on the radar as disruptions in the Red Sea raised shipping costs in Europe, while the Israeli conflict with Hamas threatened to spread to Lebanon.

There was more promising news from Washington where U.S. congressional leaders agreed on a $1.6 trillion spending deal aimed at averting a partial government shutdown.

Early gains were quickly erased and MSCI’s broadest index of Asia-Pacific shares outside Japan lost another 0.84%, after retreating 2.5% last week.

Thailand’s stocks and currency both fell after the country’s prime minister said he would speak with the governor of the central bank about cutting rates.

Japan’s Nikkei was closed for a holiday, but futures were trading at 33,400 compared to Friday’s cash close of 33,377. The index has been underpinned by a drop in the yen as the dollar enjoyed a broad bounce.

Chinese blue chips lost 1.1% to near five-year lows, having slid almost 3% last week.

The sour mood spread to EUROSTOXX 50 futures which dipped 0.2%, as did FTSE futures. S&P 500 futures and Nasdaq futures were both down around 0.1%.

The S&P 500 lost 1.5% last week to break a nine-week winning stretch, which had been its longest since 1989. The index’s 24% rally last year means valuations are looking a little stretched so much is riding on the results season.

Major banks including JPMorgan Chase and Citigroup start the reporting rush on Friday with hopes high for upbeat profits.

Consensus forecasts are that S&P 500 profits rose 3% on the year, and Goldman Sachs sees risks of an even higher outcome.

“The bar ahead of 4Q results is higher than in recent quarters, but we expect S&P 500 firms in aggregate will beat analyst forecasts,” Goldman said in a note.

“Our baseline 2024 forecast is S&P 500 EPS rises by 5% year/year, and we see potential upside from stronger U.S. economic growth, lower interest rates, and a weaker USD.”

EYEING THE CPI

Futures are pricing in around 136 basis points of U.S. rate cuts next year, compared to the Federal Reserve’s dot plot of 75 basis points.

The probability of a move as early as March has been pared somewhat to a still-high 64%, and that will likely shift again depending on Thursday’s U.S. consumer price report.

Forecasts are for core CPI to rise 0.2% in December, pulling annual inflation down to 3.8% and its lowest since mid-2021.

Analysts at TD Securities are tipping an increase of just 0.1% thanks to a large drag from used car prices and slowing rents.

There are at least four Fed speakers on the docket this week to offer their outlooks, with New York Fed President John Williams likely to be the most influential.

Inflation data from China and Tokyo are also due this week, with analysts looking for deflation to ease a touch in China.

In currency markets, the dollar surrendered a sliver of its recent gains to stand at 144.37 yen, having climbed 2.5% last week from 140.80.

The euro was almost flat at $1.0936, after slipping 0.9% last week.

The dollar’s rally was a headwind for gold, which eased 0.5% to $2,036 an ounce.

Oil prices shed early gains to turn lower as price cuts from Saudi Arabia offset the risk of supply disruptions in the Red Sea.

Brent shed 83 cents to $77.93 a barrel, while U.S. crude fell 84 cents to $72.97 per barrel. – Reuters