Asian markets were broadly higher but gains were capped as investors worried about tensions between US and China with the violent and widespread protests in the US also weighing on sentiment.

Japan’s Nikkei rose 0.84%, South Korea’s benchmark Kospi rose 0.86% and Australia’s S&P ASX 200 index edged up 0.1%

Hong Kong’s Hang Seng benchmark climbed 0.45% but China’s CSI300 was off 0.1% as investors worried about deteriorating US-China relations as the world’s two largest economies targeted each other.

“Covid-19 has devastated the US economy and labor markets, undermining Trump’s re-election odds. China has become an easy scapegoat to deflect any criticism of the US administration,” Jefferies & Co analysts said in a research note, but they believed the phase-one trade deal was likely to be honoured by both parties.

“Hence investors shouldn’t expect any rapprochement between the two adversaries until after the US election. If the US-China relationship does become more cantankerous and fractious it is not unthinkable that China will also apply its own ‘Entity’ list to US companies in areas such as rare earths and aircraft,” the note said.

Still, markets are betting improvements will be sustained after China’s macro data turned the corner, reflected in the CSI300’s gains since the last week of May, with the index on the cusp of positive territory year to date.

Economic restart

“We see the economy likely returning to near-trend growth by late 2020, supported by policy stimulus, especially on the monetary front. China’s economic restart – along with that in East Asia more broadly – underpins our modest tactical overweight in equities and credit in Asia outside Japan,” a note from BlackRock Institute said.

“We see the Chinese government’s recent economic policy actions as lending further support for the restart. A shift in tone on monetary policy – potentially opening the spigot for increased credit growth – is particularly significant. It adds to fiscal stimulus that so far hasn’t been overwhelming, in our view. Together with other positive survey data, this points to a potential strong upturn in economic growth in the second quarter,” the note said.

Credit markets were broadly upbeat as the Asia IG index moved in by a basis point at 99/100 with Hong Kong Electric in the market offering a 10-year bond deal.

Sovereign CDS were 1-2 basis points tighter with South Korea’s 5-year contract an under-performer, widening a basis point to 27/28 as the country’s GDP contracted in the first quarter and the government revised down its 2020 economic growth outlook to 0.1%. The downgrade was in sharp contrast to the previous expectation of 2.4% expansion unveiled six months earlier. 

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This report appeared first on Asia Times Financial

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