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Trade and Treasurys Rattle Asian Stocks -- Update

2 Aug 2018 4:52 am
By Mike Bird 

Asian markets had another miserable session Thursday morning, with declines almost across the board. China's Shanghai Composite Index fell 2.5%, followed by Hong Kong's Hang Seng, down 2.3%. Korea's KOSPI and Japan's Nikkei 225 declined 1.5% and 1% respectively.

Thursday's Big Theme

Asian stocks face a triple threat: U.S. Treasury yields are rising again, trade tensions are escalating, and data suggests an export slowdown has already begun. But analysts now see good value in regional markets.

What's Happening

The White House threatened to more than double proposed tariffs on Chinese imports Wednesday, suggesting a potential 25% tariff on $200 billion of goods, up from the 10% proposed initially.

Meanwhile, actual trade is already showing signs of weakening. The J.P. Morgan Global Manufacturing Purchasing Managers' Index, released Wednesday, suggested export growth is petering out.

The new exports subindex fell to 50.3 in July, the lowest in two years. Any number above 50 indicates growth, but the series has weakened every month since January. The index tends to be a good predictor of global trade volumes, although that data is only released months later.

In U.S. trading hours Wednesday, 10-year Treasury yields ticked back above 3% for the first time in around a month and a half. Higher U.S. interest rates are generally seen as a threat to emerging Asia, because they make paying back and refinancing dollar-denominated debt more arduous, and can lure capital back to America from developing markets.

Market Reaction

Despite the external pressure, strategists at JPMorgan Chase, Goldman Sachs and BlackRock have all upgraded emerging-market stocks or reiterated their optimism in the past week.

"Timing the end of the EM correction is extremely difficult but we continue to like EM equity as we think it has priced enough growth slowdown," Goldman Sachs analysts said in a research note, estimating that the recent bout of investor selling has been one of the largest since 2002.

All the analysts cite strong earnings growth, expected to be in low double-digit percentages this year, which should at least balance out the external challenges.

MSCI's flagship emerging-markets index has fallen by nearly 3% this year and now trades at around 11.4 times forward earnings, near its lowest level in two years. In comparison, the S&P 500 trades at around 16.6 times.

"We believe current valuations and strong earnings growth offer investors ample compensation for these risks," said BlackRock global chief investment strategist Richard Turnill.


Chinese web giant Baidu Inc., which is listed in the U.S., crashed nearly 8%, on news that Google was considering testing a mobile search engine which would adhere to China's strict censorship.

Japanese government bond yields retreated slightly from their highest levels in two years, dipping to around 0.13% for the benchmark 10-year security, from as high as 0.143% overnight.

The Bank of Japan this week widened its preferred trading band, allowing the 10-year to trade with a yield of between minus 0.2% and 0.2%.

Write to Mike Bird at Mike.Bird@wsj.com

(END) Dow Jones Newswires

August 02, 2018 00:52 ET (04:52 GMT)

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