Asian markets sank on Monday following big losses on Wall Street as inflation and the spreading Delta coronavirus variant fuelled worries about the global recovery, while oil prices also sank after top producers reached a deal to hike output.

Hong Kong was the worst hit after the United States warned businesses about the “growing risks” of operating in the city as China tightens its grip, raising concerns about its future as a financial hub.

With vaccines being rolled out around the world and some governments easing lockdowns, equities enjoyed a healthy first half of 2021, with many markets hitting records or multi-year highs as traders bet on a strong rebound from the pandemic. But the spread of the highly transmissible Delta variant has thrown a spanner in the works as leaders in several countries – particularly those with slow inoculation programmes – reimpose lockdowns and other containment measures. Even in parts of the world where most people have been jabbed and reopenings continue, such as England, there is a growing concern about surging infections. That has raised worries the recovery will not be as strong as first hoped.

Meanwhile, a surge in inflation has rekindled speculation the Federal Reserve and other central banks could be forced to wind down their ultra-loose monetary policies and raise interest rates sooner than expected. Treasury Secretary Janet Yellen last Thursday warned that prices rises will continue to be strong for the next few months but that they would eventually slow down.

“Markets are... dealing with a burst of inflation pressure that hasn’t been observed for quite some time,” said Michael Hood at JP Morgan Asset Management. He said there was “uncertainty about whether it will be temporary or lasting, and a Federal Reserve that is viewing all this through the lens of an untested and somewhat vague new framework, which they’ve not been able to communicate very clearly about”.

Oil drops after output deal

After Wall Street’s sharp losses, Asia followed suit on Monday.
Hong Kong suffered sharp losses, with traders also weighing a US advisory on doing businesses there in light of China’s clampdown.

The much-anticipated report acknowledged the former British colony “retains many economic distinctions” from the mainland, including stronger protections of intellectual property, but raised concerns about the fragile working environment following the introduction of a national security law last year.

Tokyo, Sydney, Singapore, Seoul, Mumbai, Manila, Bangkok, Taipei, Jakarta and Wellington were also in the red. Shanghai ended flat. “Equity markets are front and centre in Asia this morning, as increasing nerves about the delta-variant COVID-19 are sapping recovery hopes across the Asia-Pacific,” said OANDA’s Jeffrey Halley.

Increasing nerves about the delta-variant COVID-19 are sapping recovery hopes across the Asia-Pacific- OANDA’s Jeffrey Halley

Energy firms were among those suffering selling pressure after OPEC and other major producers finally reached a deal on Sunday to pump more oil, bringing an end to a standoff and sending prices down. The OPEC+ meeting agreed to produce an extra 400,000 barrels per day a month from August to meet rising demand and temper price rises. Negotiations on easing production cuts became deadlocked earlier in July owing to a row between the world’s largest oil exporter Saudi Arabia and neighbour the United Arab Emirates. Prices have been rallying in recent months as traders fretted over low supplies and improving demand.

But Daniel Hynes of the Australia & New Zealand Banking Group said: “The deal reached over the weekend is likely to lead to some further weakness in the short term, as investors unwind positions on the prospects of higher supply.” However, he said the market was still relatively tight, meaning the drop in prices would likely be short-lived.