US equities rally fizzles in Asia

Asian equities fade

Equity markets rebounded sharply overnight after strong services PMI data across Europe and the US lifted battered spirits. The veritable buffet of risks outlined yesterday, not least the US debt ceiling and spending packages, are all still there, but in a quiet data week, the buy-the-dip crowd couldn’t resist temptation. The S&P 500 rose by 1.05%, tech rebounded as the Nasdaq rallied by 1.25%, and the Dow Jones finished 0.93% higher.

That rally has quickly faded in Asia, with US index futures falling deep into the red, despite a lack of headline drivers. Nasdaq futures are 0.50% lower after news that Facebook could once again be having “technical issues,” but S&P 500 futures are also down by 0.45% and Dow futures have sunk by 0.35%. That momentum has waned so quickly could also be a function of higher US bond yields, but it does hint that US stocks will struggle to maintain gains ahead of Friday’s payroll data.

Japan, once again, has led Asia south today, the Nikkei 225 falling by 0.95%. The Nikkei seems to be suffering from a buy the rumour, sell the fact scenario, having bought stocks up before new PM Kishida’s appointment on the hopes that more fiscal stimulus is on the way. It is indeed on the way, but so it appears is a proposal to hike income tax rates for higher earners and on investment income. PM Kishida also wants a fairer distribution on national income aka China’s “shared prosperity.” The fallout from that on China equities is there for all to see, and it is not a large jump to say that higher taxes and rejigged income distribution in Japan could have a similar effect.

Mainland China remains on holiday today, but Hong Kong has also fallen by 0.95%, while South Korea’s Kospi is 1.0% lower. Taipei is down 0.35% while Singapore has struggled into the green, rising 0.20% after the government signalled yesterday it was considering various international travel corridors. Kuala Lumpur is the region’s standout, catching a strong commodity and energy price tailwind, the KLCI rising by 1.0% as bargain hunters circle Malaysia’s stock market. Jakarta is seeing a similar boost as well, the Jakarta Composite Index rising by 1.05%. Notably, Thailand and Manila have also rallied today as well.

Australian markets, though, are not receiving the same commodity tailwind. Banks and travel have led Australian equities lower today after the government said borders would not open to tourism until next year. APRA, the Australian prudential regulator, today tightened lending requirements for mortgage providers, which has weighed on the heavyweight banking sector. The ASX 200 and All Ordinaries have fallen by around 0.50%.

Australia aside, there appears to be a notable rotation in Asia today into the ASEAN value markets from the more tech-centric North Asian heavyweights. The latter are also heavy net energy and commodity importers, as opposed to ASEAN, which may be raising the perception that ASEAN is a more defensive play in Asia at the moment. I am cautious on that trade though, because a firm US Non-Farm Payroll number on Friday will have the Fed taper in play, and ASEAN is much more sensitive to potentially higher US interest rates.

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