The Bear Beckons In Asia As Shares Succumb To Fed, Inflation Fears

Asian equities plunged Tuesday, as manic moves on Wall Street rippled across global markets a day ahead of the January FOMC meeting.

Japanese stocks slid more than 1.5%, prompting The Bank of Japan to step in for the second time in 2022. The BoJ purchased 70.1 billion yen of ETFs, the same amount the bank bought on January 14, which marked the first purchases since October.

The Topix closed in a correction (figure below), and is now back to levels seen prior to the leadership change.

Apparently, GPIF was buying too. A Tokyo-based trader told Bloomberg stocks the pension fund holds in size outperformed the index and traded on high volume. In 2020, the BoJ overtook GPIF to become the largest holder of domestic equities. I don’t know if that’s still the case.

In addition to Fed jitters and Ukraine concerns, Asian equities were forced to grapple with policy tightening from MAS (Singapore) and an extremely hot inflation read out of Australia.

Annual trimmed mean inflation Down Under jumped 2.6% in Q4, data out Tuesday showed (figure below). That was well more than the 2.3% consensus expected and exceeded the midpoint of the RBA’s target range for the first time in seven years.

That, in turn, seals the deal on an end to QE, and prompted traders to fully price an RBA hike for May.

Philip Lowe has been (extremely) reluctant to countenance market pricing for “early” rate hikes insisting, at various intervals, that policy rates may not rise until 2024. Plainly, that’s no longer tenable. The RBA will have to scrap its rates guidance entirely at the next meeting. It’s not credible anymore. “Risks are skewed to an earlier liftoff,” Deutsche Bank said. “May is possible.”

Aussie stocks plunged, falling 2.5% to the lowest since May (figure below). “A fade-the-rally approach… looks the most reasonable plan of attack right now,” one analyst remarked, calling the inflation data “a bit of salt in the wound.”

It was the second 2% down day for Australian shares in three sessions and the third of the new year. New Zealand’s benchmark fell into a correction earlier this week.

More broadly, the MSCI AsiaPac index sat at its lowest levels since November of 2020. If you’re looking for bright spots, there aren’t many. South Korean shares, for example, are totally beset. After having the life sucked out of it by the LG Energy offering, the Kospi is down nearly 18% from highs seen in July. The Hang Seng is on the back foot again after attempting a rebound from a virtually uninterrupted plunge off levels reached in February 2021, just prior to escalating regulatory pressure from Beijing. And on and on.

As RBC’s Lori Calvasina told Bloomberg TV, “volatility is back.”

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