The contrasting market fortunes between the U.S. and China are well known to investors, but deepening gloom surrounding China’s property sector and a surprisingly blunt view of the economy from Beijing suggests the chasm will widen further still.
While Chinese markets could sour Asian sentiment on Tuesday, local investors have two other potential market-moving events on the slate – an interest rate decision from Indonesia and second quarter gross domestic product (GDP) data from South Korea.
Chinese stocks on Monday ended lower for a sixth day after the country’s top leaders said the economy is facing “new difficulties and challenges”, “risks and hidden dangers in key areas” and “a grim and complex external environment.”
The recovery will be tortuous, they said, and skeptical investors will need convincing that pledges to step up policy support and stimulus will be enough.
Meanwhile, real estate stocks and bonds slumped to eight-month lows on Monday as fears grow that a cash crunch is looming over two of China’s biggest developers, Country Garden and Dalian Wanda.
Monday’s meeting of the Politburo, a top decision-making body of the Communist Party and chaired by President Xi Jinping, was held a few days earlier than most China watchers had expected. That in itself is telling.
Wall Street’s start to the week, on the other hand, was much more positive. The Dow stretched its longest winning streak since 2017 to 10 days, the tech-led rally is broadening out across the market, and investors are upbeat about this week’s earnings reports.
Morgan Stanley (NYSE:MS)’s Mike Wilson, probably the most prominent equity bear this year and whose call for a lower S&P 500 was based on poor earnings, said on Monday: “We were wrong”.
In Asia on Tuesday, Bank Indonesia (BI) will hold its seven-day reverse repurchase rate at 5.75% and keep it there for the rest of the year, according to a Reuters poll of economists, as inflation is set to remain within BI’s 2-4% target range.
If BI does stay on hold, policymakers’ focus will switch to the exchange rate – further tightening from the Fed and other central banks could put the rupiah under heavy selling pressure.
It is up about 3.5% against the dollar this year, recovering from a bruising 8.5% slide last year. BI won’t want the rupiah to strengthen too much because exports will suffer, but won’t want potential inflation-boosting weakness either.
South Korea’s growth, meanwhile, likely slowed a bit last quarter as high interest rates hurt private domestic consumption and weak demand from top trade partner China weighed on exports, according to a Reuters poll.
On a year-on-year basis, GDP was expected to have expanded 0.8% in the April-June period, down slightly from 0.9% in January-March. On a quarterly basis, however, Asia’s fourth largest economy is expected to have expanded 0.5%, up from 0.3% growth in the first quarter.
Kkey developments that could provide more direction to markets on Tuesday are Indonesia interest rate decision, South Korea GDP (Q2) and Hong Kong trade (June). – Reuters
