Asian shares weaken slightly on China deflation risk, bank jitters

SYDNEY: Asian shares were on the defensive on Wednesday after data showed that China slipped into deflation in July, a negative sign for the world economic growth outlook although it could help dampen on inflationary forces globally.

European futures were up across the board, with EUROSTOXX 50 futures rising 0.9% and FTSE futures 0.5%, after Italy said its new tax on banks would not amount to more than 0.1% of total assets, soothing nerves.

S&P 500 futures climbed 0.1% while Nasdaq futures rose 0.2%.

In Asia, the MSCI’s broadest index of Asia-Pacific shares outside Japan edged 0.2% higher, following a 1.2% tumble a day earlier. Japan’s Nikkei slipped 0.4%.

Closely watched China data on Wednesday showed consumer prices fell 0.3% in July from a year ago, the first decline since February 2021, although it was slightly better than the forecast of a 0.4% drop. Producer prices fell for a 10th consecutive month.

The data followed disappointing trade figures a day earlier that fuelled concerns about the global economic outlook.

“Although the headline CPI and PPI suggest a deflation story, the pressure is not as large,” said Gary Ng, Asia Pacific senior economist at Natixis. “It is not likely to see China entering a full deflation path as core CPI is still resilient and driven by services.”

“Having said that, if we do not see further improvement in consumer sentiment, it is possible to see growing deflation risks in China.”

Both China’s blue chips and Hong Kong’s Hang Seng index eased 0.3%. China’s onshore yuan moved away from a three-week low, steadying to 7.2084 per dollar with the help of dollar selling by state banks, Reuters reported.

Chinese property developers listed in Hong Kong dropped 0.6% after a 4.8% plunge a day earlier, as worries persisted about the sector, a major pillar of economic growth.

“As things stand, policymakers are finally taking up policy easing and we believe that these efforts will be sustained until there are clear signs of improvement in aggregate demand,” said Chetan Ahya, chief Asia economist at Morgan Stanley.

“But we are mindful of the lessons from the past that if policies are prematurely tightened at the early signs of a recovery, it will increase the risk of falling into a debt-deflation loop.”

Brazil is also experiencing disinflationary forces, with consumer prices falling by more than expected in the month to mid-July. The central bank cut interest rates by 50 basis points last week.

Overnight, Wall Street finished lower in a broad sell-off after the downgrade of several lenders by Moody’s reignited fears about the health of U.S. banks and the economy. The Dow fell 0.5%, the S&P 500 lost 0.4% and the Nasdaq Composite dropped 0.8%.

The Italian government shocked markets on Tuesday by setting a one-off 40% tax on profits made by banks from higher interest rates, sending regional banking shares down 3.5%.

It later said the new tax would not amount to more than 0.1% of total assets.

Longer-term Treasury yields slipped further in Asia after solid interest for the $42 billion sale of three-year notes. 10-year yields eased 3 basis points to 3.9981%, after falling 5 basis points overnight to as low as 3.9840%, a one-week trough.

The rates-sensitive two-year yield was down 1 basis point at 4.7450% ahead of the U.S. inflation report on Thursday. Economists expect headline inflation picked up slightly in July to an annual 3.3% pace, while the core rate is seen unchanged at 4.8%.

The U.S. dollar gave back some of the overnight gains at 102.39 against a basket of currencies. The risk-sensitive Australian dollar breached a key support level overnight before bouncing back to $0.6553.

Elsewhere, oil prices were marginally lower. Brent crude futures eased 0.2% to $86.00 per barrel and U.S. West Texas Intermediate crude futures also fell 0.2% to $82.73.

The gold price was 0.3% higher at $1,930.18 per ounce. – Reuters