Asian shares set for 3rd losing week on China woes, US rates

SYDNEY: Asian shares were headed for their third straight week of losses on Friday, hammered by concerns about China’s ailing economy and fears of U.S. rates staying higher for longer after a run of strong data sent long-term Treasury yields surging.

Europe is likely to open lower as well, with EUROSTOXX 50 futures easing 0.3%. S&P 500 futures and Nasdaq futures fell 0.1% and 0.2%, respectively..

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.6% to just a whisker above a nine-month low hit the previous day. That brought the total loss for the week to 3.4% and marked the third straight week of declines for the index.

Japan’s Nikkei also lost 0.5%, heading for a weekly drop of 3.1%.

Data on Friday showed Japan’s core inflation slowed in July, a result that is likely to support market wagers that the Bank of Japan is in no hurry to phase out monetary easing anytime soon.

Chinese blue-chips dropped 0.5% and Hong Kong’s Hang Seng Index slumped another 1.3%, heading for a staggering weekly drop of 5.2%, the biggest weekly losses in two months.

Technology shares plunged 2.2%, likely weighed by reports that electric-vehicle batteries and other car parts are under scrutiny as part of Washington’s effort to stamp out U.S. links to forced labour in Chinese supply chains.

Shares of Chinese property developers listed in Hong Kong fell 1.2%, after China Evergrande filed for protection from creditors in a U.S. bankruptcy court.

The liquidity crunch seems to be spreading to China’s vast shadow banking sector, with Zhongzhi, a major Chinese asset manager, telling investors it needs to restructure its debt.

“At the start of the year China’s economy was powering ahead. But the picture has gradually worsened since, and now looks quite bleak,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.

“While it’s hard to see a catalyst for a lasting turnaround in China’s equity market, a lot of bad news is already discounted in it … Our central scenario remains that they make little-to-no gains rather than crashing.”

Goltermann said share valuations are still low and policymakers have the tools to prevent a financial crisis.

Onshore yuan moved away from a nine-month trough after the central bank set the daily fixing much higher than expected to support the currency, with traders on edge for any more direct intervention by Beijing or state-owned banks.

BOND SELL-OFF

After Treasuries were heavily sold off for the past five weeks, longer-dated maturities on Friday found some much needed support as yields near decade highs drew demand.

Ten-year yields eased 7 basis points to 4.2388%, after surging about 30 basis points this month alone to a 10-month top of 4.3280%, which pressured equity valuations and weighed on Wall Street.

A strong run of U.S. economic data, including a fall in weekly jobless claims on Thursday, suggested the world’s largest economy is not slowing as desired in the face of high borrowing costs, prompting traders to scale back rate cuts bets next year.

“The market has downsized the extent of future cuts as the economy is just not lying down,” Padhraic Garvey, regional head of research, Americas, at ING. “Confidence may be down, but the U.S. economy continues to spend and make things practically as normal.”

Indeed, the Atlanta Federal Reserve’s GDPNow forecast model suggested the U.S. economy is likely to grow at a 5.8% annualised rate in the third quarter, up from previous forecast of 5%.

In the currency markets, the U.S. dollar recovered from an earlier dip and was standing tall near a two-month top at 103.36 against its major peers. It was up 0.5% on the week.

The Japanese yen regained posture, up 0.3% to 145.40 per dollar, having been hammered this week to a nine-month low of 146.56 per dollar as yield differentials between the U.S. and Japan widened.

It, however, still neared levels that sparked an intervention by Japanese authorities late last year.

Elsewhere, oil prices were marginally lower. Brent crude futures dipped 0.2% to $83.94 per barrel and U.S. West Texas Intermediate crude futures was flat at $80.36.

The gold price was 0.1% higher at $1,891.5 per ounce. – Reuters