SYDNEY: Asian shares were on the defensive on Wednesday after data showed that China slipped into deflation in July, a negative sign for the global growth outlook although it could serve as a damper on global inflationary forces.
European futures were up across the board, with EUROSTOXX 50 futures rising 0.8% and FTSE futures 0.5% higher, after Italy said its new tax on banks would not amount to more than 0.1% of total assets.
The MSCI’s broadest index of Asia-Pacific shares outside Japan edged 0.4% higher after a 1.2% tumble a day earlier. Japan’s Nikkei slipped 0.4%.
Closely watched China data on Wednesday showed consumer prices fell 0.3% in July from a year ago, the first decline since February 2021, although it was slightly better than the forecast of a 0.4% drop. Producer prices fell for a 10th consecutive month.
The data followed disappointing trade figures a day earlier that fuelled concerns about the global economic outlook.
China’s blue chips eased 0.2% but Hong Kong’s Hang Seng index reversed earlier losses and was up 0.2%. China’s onshore yuan moved away from a three-week low to steady at 7.2143 per dollar.
Chinese property developers listed in Hong Kong dropped 0.4% after a 4.8% plunge a day earlier, as worries persisted about the sector, a major pillar of economic growth.
Asia shares on guard for US, China inflation risks
“I would say it is still a very soft report, underscoring the just very weak domestic demand in the Chinese economy … and I don’t think that’s going to disappear any time soon,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “I think the Chinese government will have to do more in terms of policy stimulus in order to counter deflation risks.”
Kong added that fading base effects and government policy support suggested deflation was likely to be short-lived, but consumer demand is still very weak.
“As things stand, policymakers are finally taking up policy easing and we believe that these efforts will be sustained until there are clear signs of improvement in aggregate demand,” said Chetan Ahya, chief Asia economist at Morgan Stanley.
“But we are mindful of the lessons from the past that if policies are prematurely tightened at the early signs of a recovery, it will increase the risk of falling into a debt-deflation loop.”
Brazil is also experiencing disinflationary forces, with consumer prices falling by more than expected in the month to mid-July.
The central bank cut interest rates by 50 basis points last week.
Overnight, Wall Street finished lower in a broad sell-off after the downgrade of several lenders by Moody’s reignited fears about the health of US banks and the economy.
The Dow fell 0.5%, the S&P 500 lost 0.4% and the Nasdaq Composite dropped 0.8%.
The Italian government shocked markets on Tuesday by setting a one-off 40% tax on profits made by banks from higher interest rates, sending regional banking shares down 3.5%.
It later said the new tax would not amount to more than 0.1% of total assets.
Longer-term Treasury yields slipped further in Asia after solid interest for the $42 billion sale of three-year notes.
10-year yields slipped 2 basis points to 4.004%, after falling 5 basis points overnight to as low as 3.9840%, a one-week trough.
The rates-sensitive two-year yield eased 1 basis point, after ending the previous session largely flat.
Markets are waiting for the US inflation report on Thursday, which is expected to show headline inflation picking up slightly in July to an annual 3.3% pace, while the core rate is seen unchanged at 4.8%.
The US dollar held gains at 102.49 against a basket of currencies, having risen 0.5% overnight on safe-haven demand.
The risk-sensitive Australian dollar breached a key support level overnight before bouncing back to $0.6536.
Elsewhere, oil prices were marginally lower. Brent crude futures eased 0.2% to $86.02 per barrel and US West Texas Intermediate crude futures also fell 0.2% to $82.73.
The gold price was slightly higher at $1,927.67 per ounce.
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