Asia stocks, oil slip as dire China data feed recession fears

Japan's Nikkei clung to gains of 0.5 per cent, having lost 2.1 per cent last week. PHOTO: EPA-EFE

SYDNEY (REUTERS) - Asian share markets stumbled on Monday (May 16) and oil prices slid after shockingly weak data from China underlined the deep damage that lockdowns are doing to the world’s second-largest economy.

China’s April retail sales plunged 11.1 per cent on the year, almost twice the fall forecast, while industrial output dropped 2.9 per cent when analysts had looked for a slight increase.

“The data paints a picture of a stalling economy and one in need of more aggressive stimulus and a rapid easing of Covid-19 restrictions, neither of which are likely to be forthcoming any time soon,” said Mr Mitul Kotecha, head of emerging markets strategy at TD Securities.

“China’s weaker growth trajectory will add to pressure on its markets and fuel a further worsening in global economic prospects, weighing on risk assets. We expect further (renminbi) depreciation.”

In Europe, EuroStoxx 50 and FTSE futures both eased 0.3 per cent. S&P 500 stock futures lost early gains to drop 0.6 per cent, while Nasdaq futures fell 0.5 per cent. Both are far from last year’s highs, with the S&P having fallen for six straight weeks.

China’s central bank had also disappointed those hoping for a rate easing, though on Sunday, Beijing did allow a further cut in mortgage loan interest rates for some home buyers.

Monday’s data overshadowed news that Shanghai aimed to reopen broadly and allow normal life to resume from June 1.

Chinese blue chips shed 0.8 per cent in reaction, while commodity currencies took a knock led by the Australian dollar, which is often used as a liquid proxy for the renminbi.

MSCI’s broadest index of Asia-Pacific shares outside Japan lost early gains to stand flat, following a slide of 2.7 per cent last week, when it hit a two-year low.

Japan’s Nikkei clung to gains of 0.5 per cent, having lost 2.1 per cent last week even as a weak yen offered some support to exporters.

Sky-high inflation and rising interest rates drove consumer confidence in the United States to sink to an 11-year low in early May and raised the stakes for April retail sales due on Tuesday.

Downgrading growth

A hyper-hawkish Federal Reserve has driven a sharp tightening in financial conditions, which led Goldman Sachs to cut its 2022 gross domestic product growth forecast to 2.4 per cent, from 2.6 per cent. Growth in 2023 is now seen at 1.6 per cent on an annual basis, down from 2.2 per cent.

“Our financial conditions index has tightened by over 100 basis points, which should create a drag on GDP growth of about 1pp (percentage point),” said Goldman Sachs chief economist Jan Hatzius.

“We expect that the recent tightening in financial conditions will persist, in part because we think the Fed will deliver on what is priced.”

Futures imply 50-basis point hikes in both June and July and rates between 2.5 per cent and 3 per cent by year end, from the current 0.75 per cent to 1 per cent.

Fears that the tightening will lead to a recession spurred a rally in bonds last week, which saw 10-year yields drop 21 basis points from peaks of 3.2 per cent. Early on Monday, yields were easing again to reach 2.91 per cent.

The pullback saw the dollar come off a two-decade top, though not by much. The dollar index was last at 104.560, and within spitting distance of the 105.010 peak.

The euro stood at US$1.0403, having gone as low as US$1.0348 last week. The dollar did lose ground on the yen, which seemed to get a safe haven bid in the wake of the China data, slipping to 129.02 yen.

In cryptocurrencies, Bitcoin was last up 2 per cent at US$30,354, having touched its lowest since December 2020 last week following the collapse of TerraUSD, a so-called stablecoin.

In commodity markets, gold was pressured by high yields and a strong dollar and was last at US$1,809 an ounce, having shed 3.8 per cent last week.

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