Asian stocks retreated on Tuesday on concerns over the impact of China’s COVID restrictions on the world’s second-largest economy as investment banks slashed their forecasts.
A strong rally on Wall Street, where the Dow closed 2.0 per cent higher, did not carry over to Asia, and Beijing’s announcement of a fresh raft of measures to stimulate the economy did little to calm nerves. The package announced on Monday includes more than 140 billion yuan (€19.7bn) in additional tax rebates, bringing the total amount of tax relief this year to 2.64 trillion yuan, Xinhua news agency reported following a meeting of the State Council chaired by Premier Li Keqiang.
China’s economy has taken a hit from Beijing’s zero-COVID approach to the pandemic, which has resulted in lengthy lockdowns of major cities and mass testing of millions of people. Prolonged virus lockdowns have constricted supply chains, dampened demand and stalled manufacturing.
Investment banks UBS Group and JPMorgan Chase cut their China economic growth forecasts due to the impact of the coronavirus strategy. UBS on Tuesday cut its 2022 GDP growth forecast to 3.0 per cent from 4.2 per cent while JPMorgan on Monday trimmed its forecast to 3.7 per cent from 4.3 per cent, Bloomberg News reported.
“The lingering restrictions and lack of clarity on an exit strategy from the current COVID policy will likely dampen corporate and consumer confidence and hinder the release of pent-up demand,” UBS economists including Tao Wang wrote in a research note, according to Bloomberg.
The lingering restrictions and lack of clarity on an exit strategy from the current COVID policy will likely dampen corporate and consumer confidence and hinder the release of pent-up demand- UBS economists
China has targeted full-year growth of around 5.5 per cent, but data published in April showed that first-quarter growth slowed to 4.8 per cent after its economy lost steam in the latter half of last year. Concerns over the economic fallout from China’s dogged pursuit of a zero-COVID approach and its knock-on impact on supply chains and the wider global economy spooked investors, with Asian markets well into the red on Tuesday.
Tokyo was off 0.5 per cent while Hong Kong was down 1.5 per cent after the city’s leader Carrie Lam said there would likely be no relaxation of quarantine travel restrictions for the remainder of her term, which ends on June 30. Shanghai and Seoul were both down 0.8 per cent, while Taiwan, Bangkok, Sydney and Manila also retreated. Singapore was one of the few markets to post gains.
Later in the week, investors will be eyeing the minutes from the latest Federal Reserve rate-setting meeting for clues about further rate hikes aimed at reining in inflation. A raft of economic figures will also provide insights into the state of the US economy.
“If inflation remains sticky and the Fed needs to be more aggressive, assets are not cheap enough yet – in that world, more recession risk will need to be priced through lower earnings,” said Stephen Innes of SPI Asset Management. “However, if inflation does cool down, there are many compelling opportunities, significantly if ‘storm clouds’ over the economy dissolve.”
Oil was lower, with both contracts down 0.4 per cent. “Energy traders see choppy waters ahead for oil prices as uncertainty persists with the global economic outlook and over the EU’s progress with a ban on Russian oil,” said Edward Moya of OANDA