Early equity rally fades in Asia

Asian markets mixed after US inflation data

With Wall Street in transitory inflation rather than sticky inflation mode overnight, equity markets moved higher. Headline inflation rose by 0.60% versus 0.40% expected. Core inflation rose by 0.70%, also versus 0.40% expected.

Given that US inflation for May was considerably higher than expected, one would have expected equities to fall. Instead, precisely the opposite happened, leaving many disappointed inflationistas scratching their heads. The markets appear to have bought in to the Fed message that higher inflation is transitory.

The S&P 500 finished 0.47% higher, with the Nasdaq jumping 0.78%, while the Dow Jones managed only a 0.04% rise. In addition, US yields sank once again after the inflation data, helping the rally along with index futures in Asia ever so slightly in the green.

Asian equity markets rallied initially but quickly ran out of momentum, with much of the region slipping back to unchanged or slightly down. Regional investors appear content to continue reducing exposure ahead of the weekend, and there could be some concerns that the G-7 meeting in progress at the moment could spring some surprises.

The Nikkei 225 is now down 0.10% after rallying earlier, although the Kospi remains in positive territory, up 0.40%. In China, the Shanghai Composite is 0.25% lower while the CSI 300 has fallen 0.60%, although the Hang Seng has risen 0.50%. Singapore is 0.10% higher, while Kuala Lumpur has declined 0.30%. Jakarta is down 0.30%, but Taipei has climbed by 0.35%. Australian markets have given back some early gains, but both the ASX 200 and All Ordinaries remain 0.25% higher today.

Although upside momentum has quickly waned in Asia, the benign reaction by US markets to the inflation data is providing some support. That should be enough to lift European markets slightly this afternoon, although, with a quiet data calendar, both Europe and Wall Street are likely to finish the week with choppy range trading driven by headline risk.

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