China Reserve Ratio cuts lifts Asia

China RRR cut boosts Asian equities

Asian equities are higher today after a surprise RRR cut by China on Friday and an upbeat Wall Street session lifted sentiment. The Nikkei 225 has raced 2.20% higher, while the Kospi has rallied by 1.0%. Notably, China’s mainland markets and its nearby neighbours are outperforming. China’s Shanghai Composite is 1.0% higher, with the CSI 300 leaping by 1.60%. However, the China rally could sour if China’s Trade Balance, Industrial Output, Retail Sales and GDP data releases this week show a slowing down of the pace of the China recovery.

US index futures have eased slightly by around 0.20% this morning, but the move looks corrective after a powerful Wall Street session on Friday. The S&P 500, Nasdaq and Dow Jones all hit record highs on Friday. The S&P 500 rose 1.13%, the Nasdaq climbed 0.98%, and the Dow Jones rose 1.30%.

Across regional Asia, stocks are also higher, although less so than in Northern Asia. The expanding China tech-clampdown has muted sentiment in Hong Kong, which is just 0.40% higher. Singapore is 0.25% higher, with Taipei climbing 0.85%. Jakarta has risen 0.80% on commodity prices and IPO fever, but Kuala Lumpur has fallen by 0.40%, with politics and Covid-19 cases weighing on sentiment. Australian markets are shrugging off the Sydney lockdown for now, following US markets and the China RRR rally higher. The ASX 200 has risen 0.80%, while the All Ordinaries has climbed higher by 0.70%.

Northern Asian markets with high beta and geographic location to China are outperforming today. However, that rally may run out of steam as the week progresses if China’s tier-1 data releases suggest the pace of the recovery there is slowing. It would inevitably weigh on sentiment across the rest of the region, with the Asia-Pacific as a whole-ex China, grappling with the cold hard realities of Covid-19. Additionally, a 4.0% plus US Core CPI this week is likely to see EM outflows increase, and DM markets outperform, notably the northern hemisphere heavyweights.

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