Recovery worries shake Asian markets

Stock markets in Asia were awash in red on Thursday, reflecting sharp overnight losses on Wall Street, as weak housing data from the US and early signs of monetary tightening in China raised doubts about the sustainability of the global economic recovery and prompted a flight to safe-haven currencies.

Stock indices across the region fell sharply - Hong Kong and Shanghai (by 2.3%), Australia and Taiwan (2.4%), Tokyo (1.8%) and Korea (1.5%) - on fears that a 3.6% fall last month in sales of newly built homes in the US may mean that the global economic recovery is faltering. The data rattled US stock markets too, with the Dow Jones index falling 1.2% overnight.

Asian markets were also unnerved by a draft rule issued by China’s banking regulator to amend rules relating to personal lending, which they interpreted as an early sign of monetary tightening in the fastest-growing major economy with arguably the highest levels of liquidity. Under the new rule, advances in excess of 300,000 yuan will be given not to the borrower but to the counterparty.

The US dollar and the Japanese yen strengthened against other major currencies, gaining from a widespread risk aversion and flight to safe-haven currencies. “The negative correlation between the US dollar and nearly all risk assets has been nothing short of eye-popping,” note analysts at financial services firm GaveKal. 

High-yielding Australian and New Zealand currencies fell to three-week lows against the US dollar and Indonesia’s central bank intervened for a second day to support the rupiah.
Stock market investors were also booking profits after a 70% rally in the World MSCI index since March; additionally, ongoing criminal probes (against the hedge fund Galleon in the US and against the K1 fund of funds in Germany) have triggered fears of liquidation of positions and prompted marginal buyers to keep on the sidelines, they said. 

Geopolitical concerns, too, weighed on sentiments. Sensational terrorist attacks in Iraq, Afghanistan and Pakistan and the news that Iran was months away from producing a nuclear bomb heightened concerns that the US is at risk of losing the war in Afghanistan - “a possibility which the market may not be enthused about.” 

China has played an “unprecedented role in the global rebound,” says GaveKal analyst Joyce Poon. “Thus, keeping tabs on China’s policymakers is now at least as important as monitoring the Fed’s actions.”

Yet, despite all these “legitimate concerns”, the analysts said they believed that the markets would end the year “higher than they are today” since the “three pillars of a bull market - attractive valuation, excess liquidity and decent economic growth - were present in almost all markets.”