Asian stocks suffered heavy selling on Friday, intensifying a two-week slide that leaves them at their lowest levels in a month. Many have been coming off all-time highs.
The MSCI Asia ex-Japan index fell 3.4%, its heaviest losses in nine months. The one-week 5% fall is the worst since the coronavirus selloff last March. Asian stocks did have a significant blip at the end of January, though, before rallying back and beyond. They remain way above (precisely: 76.4%) their Covid-induced lows of last March. We will see if this decline is sustained next week. It appears it may be.
There's no clear Asia-specific catalyst to the broad-based declines. The selling is in response to U.S. weakness, although the Asian declines were greater than the 2.5% fall in the S&P 500 on Thursday, or the 1.8% drop in the Dow.
A lot of market watchers identify the flareup in bond yields as the current culprit. I don't buy it. Why all of a sudden are we obsessed with the 10-year Treasury and sudden-onset inflation, when there's no evidence economies are in the clear or that central banks are anywhere near removing their stimulus? No one other than bond traders cared about those factors two weeks ago. Inflation is no greater a threat here on Friday than it was a fortnight back.
Let's be honest, the stock gains and records of recent weeks have seemed detached from reality. The selling will continue if that reality settles in. The economic recovery and the fight against the coronavirus both looking promising, but far from certain in direction or duration.
If inflation does creep back in, it will only do so at a time economic recovery is more advanced - which would be a good thing for the companies underlying stocks. The Wall Street losses have effectively priced in the chance of an interest-rate hike of 0.25%.
Absent any region-specific drivers, it looks like Asian shares will continue to track the S&P 500, which has also drifted since the start of last week. It's a pattern repeated in many Asian markets. Thursday's sharp dip in the S&P on Wall Street provoked an even sharper response in Asia on Friday.
The Topix index of all major stocks in Japan fell 3.2% on Friday, meaning it's now down 5.1% since starting to slip on February 16. The Nikkei 225, fresh off 30-year highs, sank 4.0% to 28,966 on Friday, and is down 5.1% since breaching the 30,000 level for the first time since 1990.
Chinese shares closely tracked the S&P 500 decline, with the CSI 300 index of the largest stocks in Shanghai and Shenzhen down 2.4% on Friday. The selloff started first in China, a week earlier. Chinese stocks set an all-time high of 5,931 when trading resumed after the Lunar New Year holiday, and have given back 10.0% since then.
In Australia, the central bank is concerned enough about the sudden pace of correction that it is intensifying its program of bond buying. The S&P/ASX 200 was down 2.4% on Friday, accounting for a large chunk of its 3.5% slide since Tuesday last week.
In Hong Kong, the Hang Seng fell 3.6% on Friday. The much-despised government announced a HK$120 billion (US$15.3 billion) budget on Thursday, with a sweetener of HK$5,000 (US$640) in spending vouchers handed out per person. When it can't think of anything constructive to do, the government hands out cash in the hopes that will keep everyone quiet. It has also earmarked HK$6.6 billion (US$841 million) to create 30,000 short-term jobs - wouldn't it be better to create long-term ones?!
Of most interest to investors, the finance secretary announced that the government will raise the stamp duty on stock trading from 0.10% to 0.13%. There's no capital gains on stock trading in Hong Kong, so stamp duty is the main way the government raises income from the market.
Stamp duty has been cut three times since 1993, so this is the first hike in almost 30 years. The analysts at CCB International note that the brunt will be borne by high-frequency traders and brokerages. The duty would add around 8% to existing transaction costs, they note, but won't be of concern to long-term investors.
The increase in interest rates needs to be passed by the Legislative Council, a given since there's no opposition in the rubber stamp Congress anymore, after all pro-democracy legislators resigned. Approval will likely come in May. Derivatives and pooled investments such as ETFs are exempt from the stamp duty, so we could see an increase in trading activity for those vehicles.
