Asian shares weakened slightly on China deflation risks and banking jitters

A passer-by walks past an electric monitor showing stock price indices of various countries outside a bank in Tokyo, Japan on March 22, 2023. REUTERS/Issei Kato

  • China CPI down 0.3% y/y; Follows disappointing trading data
  • U.S. bank stocks fell on Moody’s downgrade
  • European futures rose 0.8% as Italy’s tax windfall rattles banks

SYDNEY, Aug 9 (Reuters) – Asian stocks were on the defensive on Wednesday after data showed that China slipped into deflation in July, a negative sign for the global growth outlook, although it could help ease inflationary forces globally.

EUROSTOXX 50 futures rose 0.9% and FTSE futures rose 0.5%, European futures rose across the board after Italy said its new tax on banks would not exceed 0.1% of total assets.

S&P 500 futures rose 0.1%, while Nasdaq futures rose 0.2%.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) was 0.2% higher, following a 1.2% decline a day earlier. Japan’s Nikkei (.N225) fell 0.4%.

Closely watched China data on Wednesday showed consumer prices fell 0.3% in July from a year ago, the first decline since February 2021, though it was slightly better than forecasts for a 0.4% drop. Producer prices fell for the 10th consecutive month.

The data followed disappointing trade figures a day earlier that fueled concerns about the global economic outlook.

“While the headline CPI and PPI suggest a deflationary story, the pressure is not great,” said Gary Ng, Asia Pacific senior economist at Natixis. “We are unlikely to see China enter a full deflationary path as core CPI is still resilient and driven by services.”

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“If we don’t see further improvement in consumer sentiment, we could see deflationary risks rising in China.”

China’s Blue Chips (.CSI300) and Hong Kong’s Hang Seng Index (.HSI) both fell 0.3%. China’s onshore yuan was steady at 7.2084 per dollar, buoyed by dollar selling by state-run banks, moving from a three-week low, Reuters reported.

Hong Kong-listed Chinese property developers ( .HSMPI ) fell 0.6% after a 4.8% decline a day earlier, as concerns lingered about the sector, a mainstay of economic growth.

“As things stand, policymakers are finally easing policy and we believe these efforts will continue until there are clear signs of improvement in aggregate demand,” said Chetan Ahya, chief Asia economist at Morgan Stanley.

“But we are mindful of past lessons that if policies are tightened prematurely at early signs of a recovery, that increases the risk of falling into a debt-liquidation cycle.”

Brazil is also experiencing inflationary forces, with consumer prices falling more than expected in mid-July. The central bank cut interest rates by 50 basis points last week.

Overnight, Wall Street eased in a broad sell-off after Moody’s rekindled fears about the health of U.S. banks and the economy after downgrading several lenders. The Dow (.DJI) fell 0.5%, the S&P 500 (.SPX) lost 0.4% and the Nasdaq Composite (.IXIC) fell 0.8%.

The Italian government on Tuesday shocked markets by imposing a one-time 40% tax on banks’ profits from higher interest rates, sending regional bank shares (.SX7E) down 3.5%.

It later said the new tax would not exceed 0.1% of total assets.

Longer-term Treasury yields in Asia fell further after solid interest in $42 billion in three-year note sales. The 10-year yield fell 3 basis points to 3.9981%, down 5 basis points overnight to 3.9840%, a one-week trough.

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The rate-sensitive two-year yield fell 1 basis point to 4.7450% ahead of Thursday’s US inflation report. Economists expect headline inflation to pick up slightly to an annual pace of 3.3% in July, while the core rate is seen unchanged at 4.8%.

The US dollar gave back some gains at 102.39 overnight against a basket of currencies. The risk-sensitive Australian dollar broke through a key support level overnight and returned to $0.6553.

Elsewhere, crude oil prices fell. Brent crude was down 0.2% at $86.00 a barrel and US West Texas Intermediate crude futures were also down 0.2% at $82.73.

Gold prices rose 0.3% to $1,930.18 an ounce.

Report by Stella Qiu. Additional reporting by Ellen Zhang in Beijing; Editing by Jamie Freed, Edmund Claman and Simon Cameron-Moore

Our Standards: Thomson Reuters Trust Principles.

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