Asian stocks fall on Fed fears and China Covid lockdown

Asian stocks fell to their lowest level in seven weeks on Friday, but the dollar held up as investors around the world shunned riskier assets on fears that higher US interest rates and China’s strengthening of its zero-Covid policy could hit growth hard.

SCI’s broadest index of Asia-Pacific stocks outside Japan slipped 2.54 percent, falling to its lowest level since March 16, the day Chinese Vice Premier Liu He buoyed stocks by promising to support the markets and the Chinese economy.

The benchmark is down 3.6 percent from last Friday’s close, which would have been its worst week since mid-March. Bucking the trend, Japan’s Nikkei rose 0.8 percent after returning from a three-day holiday.

Chinese blue chips shed 2.6 percent, the Hong Kong benchmark lost 3.6 percent and China’s yuan fell to an 18-month low in both onshore and offshore markets.

Dickie Wong, research director at Hong Kong brokerage firm Kingston Securities, attributed the declines to the US market’s overnight slump and fears over the health of China’s economy.

China will combat any comments and actions that distort, doubt or deny the country’s Covid-19 response policy, state television reported Thursday after a meeting of the country’s top decision-making body.

Investors said this appears to rule out an easing of the zero-Covid policy, which is slowing Chinese economic growth and disrupting global supply chains.

“The silver lining is the expectation that new Chinese fiscal measures could come out over the weekend,” Mr Wong said. “It’s the only thing that gives Asian markets some support at their current low valuations.”

Overnight, both the Dow Jones Industrial Average and the S&P 500 fell more than 3 percent, and the Nasdaq Composite lost 4.99 percent in its biggest daily drop since June 2020.

However, things were slightly better in Europe, where regional equity futures fell 0.14 percent and FTSE futures fell 0.2 percent. US futures were flat.

The declines in the US market were largely the result of concerns about the pace of US Federal Reserve tightening.

“Risks of policy failure remain elevated, either because (the Fed) is not tightening fast enough to fight inflation or is overly hawkish, leading to the end of the current business cycle,” said David Chao, global market strategist, APAC ex Japan. at Invesco.

According to the CME’s FedWatch tool, the market is pricing in an 82 percent chance of a whopping 75 basis point rate hike by the Fed at its June meeting, even after the Fed hiked rates by 50 basis points this week and Chair Jerome Powell ruled out had a 75 basis point hike.

US yields are rising on expectations of rapid rate hikes.

The US 10-year bond yield was last seen at 3.055 percent after surpassing 3.1 percent overnight for the first time since November 2018.

As investors moved towards less risky assets, the dollar index came in at 103.62 on Friday after hitting a new 20-year high of 103.94 overnight, helped by expectations that the US would hike interest rates faster than others central banks will increase.

The dollar index is up 0.43 percent this week for the fifth straight week of gains.