China’s flagging economy is hurting Asian equity markets, with losses continuing into the second month

On Wednesday, Asian stock markets fell for the second straight month, and even the dazzling Nikkei faltered, as dismal Chinese manufacturing data stoked growing fears about the world’s second-biggest economy recovering from the pandemic.

MSCI’s most comprehensive index of Asia-Pacific equities outside Japan was down 1 percent in early trade and is down 2.4 percent for the month as prospects of a strong China comeback faded.

Chinese manufacturing activity fell faster-than-expected this month on deteriorating demand, with the official manufacturing PMI falling to 48.2 from a forecast 49.4.

The yuan then fell to a six-month low of 7.1090 per dollar, down more than 2.6 percent from the previous month, as measures ranging from manufacturing to industrial profits, retail sales to credit growth missed and in some cases collapsed.

“There were concerns that China’s economic comeback could be so strong that it would complicate the fight against inflation by advanced-economy central banks,” said Carol Kong, economist and monetary strategist at the Commonwealth Bank of Australia.

“As we look back today, those expectations seem misplaced.”

The disappointment has also impacted other China-sensitive assets. The Australian dollar slips into a fourth straight monthly loss, barely off last week’s seven-month lows at $0.6492.

Australian stocks face their worst month since February, down 2.4 percent. A tourism-led rally in the Thai baht and the stock index has failed to materialise.

Hong Kong’s Hang Seng fell 8 percent in May and fell 1.6 percent on Friday.

Even stocks in Asia’s largest market, Japan, took a breather on Wednesday. The benchmark Nikkei fell 0.8 percent, but that’s a 7.7 percent monthly gain that pushed the index above 31,000 to its highest level in more than 30 years.

“Inflation triggered by structural labor shortages is forcing companies…to fundamentally rethink their pricing strategies, and there are clear signs that change is on the way,” said Bank of America strategist Masashi Akutsu.

“If they can achieve a double-digit return on equity, that would put the 1989 peak within reach. Based on these factors, we are increasing our targets for Japanese equities to 2,300 for TOPIX and 32,500 for the Nikkei 225 by the end of 2023.”

debt reconciliation

Outside of Asia, the US debt ceiling remains in focus, with markets hoping that an agreement President Joe Biden reached with the top Republican in Congress to suspend the US borrowing limit can go through Congress in the coming days.

The plan was approved overnight by a House committee and is scheduled for debate and passage on Wednesday, taking it to the Senate, where debate could stretch into the weekend.

Treasury bonds rallied after the initial deal was struck on expectations that a US default would be averted, but the market remains nervous as the Treasury is likely to issue large amounts of debt to keep its coffers once borrowing is approved to fill up.

The benchmark 10-year yield fell 12.4 basis points overnight and fell another 1.5 basis points to 3.6808 percent in Asian trading on Wednesday. Yields fall when bond prices rise. Two-year yields fell 2.5 basis points to 4.448 percent on Wednesday.

The drop in yields interrupted what was arguably the strongest monthly rally in the US dollar since February. For the month, the euro is down about 2.8 percent against the greenback to $1.0706 and the yen is down about 2.5 percent to 139.83 to the dollar, down from 140.93 on Tuesday Hit six-month low.

Japan will monitor currency movements closely and will not rule out any options, its top currency diplomat said Tuesday after fiscal officials met after the yen’s slide.

In commodity markets, benchmark Brent crude futures are down 7.7 percent this month to $73.41 a barrel on growth fears. Gold is down from its two-and-a-half-year high at $1,954 an ounce.

German inflation figures are expected later in the day. Data showed that inflation in Australia accelerated in April and central bank governor Philip Lowe told lawmakers households should brace for pain ahead in a bid to stem rising prices.

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