Hong Kong: financial markets rode tailwinds from US data but gains were contained after the recent rally helped China’s stock markets turn green for the year, with Japanese and Australian stocks not far behind. Investors are digesting the recent gains and looking at the implications of the rally.
“For the real economy, a big rally in stock prices is a double-edged sword. On the positive side, bull stock markets may be good for consumption thanks to the wealth effect, and good for business investment thanks to ease of access to cheaper funding,” said Nomura’s Chief China Economist Ting Lu.
“On the negative side, funds, with some in the form of bank credit, may be redistributed from the real economy to stock market for speculation. The overly hot stock markets may also prevent Beijing from continuing its policy easing which is necessary for a recovery from the Covid-19 shock.”
The mainland China stock index CSI 300 is up 1.8% and is up 16% this year. The Nikkei 225 is down 0.56% and the Australian S&P/ASX 200 is up 0.7% and both the indexes have pared their year-to-date loss to single digits.
The Reserve Bank of Australia kept policy settings unchanged today but sounded more optimistic and its statement was more upbeat, highlighting that the downturn has been less severe than anticipated, hours worked have slumped by less than expected and that retail spending has picked up.
“We think that subdued demand will eventually result in a more pronounced weakening in inflationary pressures,” said Marcel Thieliant, Senior Australia & New Zealand Economist at Capital Economics. He expects inflation to bottom out near-zero instead of the 1% predicted by the RBA. “We think the Bank may yet respond with a renewed increase in its bond purchases, perhaps by early 2021.”
The renewed outbreak of the virus in Melbourne has already had an economic impact hurting Victoria, New South Wales and Queensland with the border between New South Wales and Victoria set to remain closed – for the first time since the Spanish Flu nearly a century ago.
Wall Street rally
Overnight, Wall Street rallied on a sharp rebound in U.S. services industry activity in June. The Dow Jones Industrial Average added 1.78%, the S&P 500 gained 1.59% and the Nasdaq Composite advanced 2.21%.
Asian credit markets took a breather after the recent sharp rally with the Asia IG index narrowing by a basis point at 78/79 bps and sovereign CDS marginally tighter.