By Wayne Cole
SYDNEY (Reuters) – Asian stock markets were trying to pick up the pieces on Monday after last week’s crisis, with coronavirus concerns showing little sign of slowing, while safe-haven flows benefited the dollar ahead of a key update on US monetary policy.
A series of “flash” manufacturing surveys for August, released on Monday, will offer a first indication of where global growth is going against the Delta variant, with analysts expecting some slippage, particularly in Asia.
Concerns about the Chinese economy have only intensified in recent weeks, as Beijing’s regulatory crackdown on the tech sector has dealt a double blow to the markets.
More than $ 560 billion was wiped from the Hong Kong and mainland stock exchanges last week as funds worried about areas regulators could target next.
The impact has been all too evident in the MSCI’s largest Asia-Pacific stock index outside of Japan, which fell 4.8% last week to a nine-month low. Early Monday, it had limped up 0.2% but the gains appeared fragile.
The rot spread to Japan where the Nikkei lost 3.4% last week to its lowest since January. The bargain hunt helped the index rebound 1.2% on Monday morning.
“After a strong V-shaped recovery, there are many signs of slowing growth,” said Michael Hartnett, chief investment strategist at BofA.
“The US yield curve is at its lowest in a year, emerging markets have been negative since the start of the year, and copper and oil are down double digits from recent highs.”
He expects negative returns for equities and credit in the second half of this year and suggests investors have some defensive quality.
The spread of the Delta variant also has the potential to disrupt the timing of the U.S. Federal Reserve’s spending cuts plans.
Dallas Federal Reserve Chairman Robert Kaplan, a well-known hawk, said on Friday he might reconsider the need for an early start to the reduction if the virus harms the economy.
It adds an added thrill of uncertainty to Fed Chairman Jerome Powell’s speech in Jackson Hole this week, which had to be uploaded due to pandemic restrictions.
“Our baseline scenario is that the FOMC will announce a cut in September if the August non-farm payroll is strong,” said Joseph Capurso, head of international economics at the CBA.
“We expect the reduction to be implemented in October or November, although the recent increase in Covid infections and deaths in parts of the United States may give Powell a break.”
This contrasts with the European Central Bank market which is under pressure to add more stimulus, putting the dollar ahead of the euro.
“Unlike the Fed, we don’t expect the ECB to move away from its ultra-dovish monetary policy,” Capurso said. “We expect the euro to drop to a low of $ 1.12 in the first quarter of 2022, before gradually appreciating.”
The single currency was trading at $ 1.1697, after losing 0.8% last week to hit a 10-month low of $ 1.1662. This in turn helped the dollar index hit a 10-month high at 93.734, and it was the last trading company at 93.507.
The dollar made big gains in commodities and emerging market currencies, and strengthened against the Chinese yuan.
It was more moderate against the Japanese yen at 109.84, which is also benefiting from safe haven flows.
Global growth nervousness weighed heavily on commodities last week, with base metals, bulk resources and oil all falling.
Gold was more stable at $ 1,777, after falling a day earlier in August.
Oil had suffered its biggest week of losses in more than nine months, as investors anticipated weakening global fuel demand due to an increase in COVID-19 cases. [O/R]
Early Monday, Brent had edged up 37 cents to $ 65.55 a barrel, while US crude rose 27 cents to $ 62.41.
(Edited by Shri Navaratnam)