Asian stocks see red on rate hike jitters

ASIAN markets fell across the board on Monday (Aug 29) as worries heightened over more interest rate hikes that could pile recessionary pressures on the global economy. Leading the losers were Japan, down 2.66 per cent, followed by Taiwan which finished 2.31 per cent lower.

The Straits Times Index, Singapore’s benchmark, ended the day 0.84 per cent lower. Bucking the trend were China, up 0.14 per cent at market close, and Malaysia, which pared earlier marginal losses and finished 0.09 per cent higher.

The Business Times answers 4 questions on the day’s market developments.

1) What’s spooking equity markets?

Disappointment that a pause to the US Federal Reserve’s rate hikes is out of sight – for now at least – following remarks by Fed chief Jerome Powell following the Jackson Hole symposium. Powell’s hawkish speech that taming scorching inflation was a top priority, and rates are expected to be higher despite the dent to economic growth, was a blow to markets expecting a more dovish forward guidance for 2023.

His words: “While higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses.”

2) Why do markets care?

While restrictive monetary policy is a useful and necessary tool to contain inflation (note: inflation in the US is still running near its highest level in over 4 decades), the big worry is that it could tip the world’s largest economy into recession and, by extension, hurt global growth. The global drum beat of recession is getting louder amid worries over rising rates and red-hot inflation, while geopolitical tensions and energy woes show no signs of abating. These do not bode well for corporate earnings, and the equity markets are reflecting such fears.

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3) What are recent key data to unpack and watch out for?

• Australia released July retail sales that beat expectations. This could indicate consumer resilience, although the latest digits could also reflect the higher prices.
• Malaysia’s July consumer price index (CPI) rose 4.4 per cent from a year earlier in July, driven mainly by food items.
• PMI (purchasing managers’ index) data from the US, Europe, the UK and China set to be released later in the week, which will provide updates on the health of the global economy amid recession fears.
• Q2 2022 GDP (gross domestic product) showing by India, South Korea, Italy, Canada, Poland and the Czech Republic – the data will be scrutinised for signs of further slowdowns.
• Eurozone inflation out mid-week (analysts reckon this could remain uncomfortably high, chiefly owing to Russia’s move to curtail petrol exports, which has compounded Europe’s energy dilemma).
• The week will close off with US non-farm payrolls – a key recession-risk indicator. While July’s data jumped past forecasts, markets are expecting a sharp reduction in non-farm payroll growth for August.

4) What should investors do?

According to Citi Private Bank’s CIO Strategy Bulletin: “Quality matters, dividends matter and earnings will matter. Easy monetary policy will not be forthcoming to bolster weak assets. Chasing sharp rebounds in risky equities and high yield credit on short-covering moves is not an ideal strategy for the year ahead.

“We continue to overweight portfolios seeking the reliable sources of return: investment grade credit and strong dividend paying shares.”