KEY Asian markets tumbled on Thursday (May 19), as Wall Street ended sharply lower overnight on fresh worries over the US economy after retailer Target Corp missed estimates.
Target on Wednesday reported a 52 per cent drop in Q1 net profit, and warned that rising fuel and freight costs could put a bigger dent in its margins this year. This came a day after rival Walmart cut its annual profit forecast.
The result was the worst 1-day loss for the S&P 500 and Dow Jones Industrial Average since June 2020.
"Weaker-than-expected earnings from Target stoked worries about inflation impact on corporate earnings and consumer demand," said DBS equity market strategist Yeo Kee Yan.
Analysts say the plunge in US equities is dragging Asian markets down, amid ongoing concerns that also include supply chain disruptions, China's economic slowdown due to its continued zero-Covid policy, and inflated commodity prices due to the ongoing Ukraine war.
Hong Kong's Hang Seng index fell as much as 3.5 per cent in morning trading on Thursday before recovering slightly to close 2.7 per cent lower, Japan's Nikkei 225 slid as much as 2.8 per cent before closing down 1.9 per cent, and South Korea's Kospi Composite index declined by up to 2.2 per cent before ending 1.3 per cent lower.
Singapore's Straits Time Index fell as much as 1.5 per cent in the day, while the FTSE Bursa Malaysia KLCI was down as much as 0.6 per cent.
"The current wave of selling is due to a downgrade in earnings expectation due to rising materials cost, excess inventory, overstaffing and a post-pandemic shift away from goods spending," said Paul Chew, head of Phillip Securities Research.
"Investors are generally concerned about the health of the global economy in view of rising interest rates, collapse in household wealth and margin pressure from rising inflation," he added.
The spectre of inflation was also magnified by the release of consumer price data for April from the UK and Canada, which both saw decades-high increases.
"Elevated inflation readings out of the UK and Canada seem to be the culprit for the risk-off mood, serving as a reminder for markets that the fight against inflation among central banks globally will be a challenging process," said IG market strategist Yeap Jun Rong.
He added that there could be "greater pressure on central banks to continue with aggressive rate hikes ahead", which brings back "fears of a dampened economic outlook and dwindled optimism for a soft landing".
For investors hoping for an end to the market volatility, however, there is still some way before the light at the end of the tunnel.
"Sentiment should remain tentative over the next few weeks but we will be keeping a close eye on whether inflationary pressures start to ease in H2," said Yeo, adding that market corrections and rallies are to be expected amid a seasonally volatile period up to the mid of Q3.
"We think May's month-to-date decline is in-line with the Singapore market entering a seasonally more volatile period of the year, typically lasting from May to August or slightly beyond," he said.
Meanwhile, Phillip's Chew opines that the market uncertainty could extend up to the end of Q3.
"We expect bearish sentiment to persist until the Fed tightens interest rates (which currently stands at 0.75 per cent) to its neutral level of around 2.5 per cent - likely by end Q3 2022," Chew said. "Alternatively, any sign of inflation rolling over will be a trigger for equities to rally."
At the same time, DBS's Yeo said investors will also be watching closely for any signs of China starting to shift away from its zero-Covid policy, especially in the latter half of H2.