Asian stocks experienced declines amidst speculation that investors are adjusting their positions ahead of a series of upcoming events, including major central bank decisions, key economic data releases, and earnings reports from US megacap companies. Futures in the US and Europe showed minimal changes.
The MSCI Asia Pacific Index is set to record a 0.4% decline in July, marking its first monthly drop since April. On Tuesday, Hong Kong shares led losses, dropping more than 1%, as optimism waned regarding the Chinese government’s stimulus efforts.
The yen weakened against all major currencies in the Group-of-10 as the Bank of Japan commenced a two-day meeting. There is speculation that any tightening of policies by the Bank of Japan will proceed cautiously, which may not immediately diminish the attractiveness of yen-funded carry trades. The dollar showed mixed performance as traders positioned themselves ahead of the Federal Reserve meeting scheduled for Wednesday. Meanwhile, US Treasuries saw little change, on track for a third consecutive month of gains.
“Market participants are reducing their exposure to risk in anticipation of significant event risks this week, ranging from key central bank meetings to earnings from Big Tech companies,” said Charu Chanana, a strategist at Saxo Capital Markets in Singapore.
Investors are closely watching the Bank of Japan Governor Kazuo Ueda’s announcements on Wednesday, expecting details on the central bank’s plans for quantitative tightening after years of extensive easing. There is also speculation about a potential interest rate hike. The central bank aims to see sustained wage increases driving consumption recovery and stimulating demand-led price growth, which would facilitate further normalization of monetary policy.
China’s bonds saw gains, with yields on 10-year bonds reaching record lows. This rally is testing the patience of the central bank, which is navigating between boosting growth through easing measures and curbing potential financial risks from an overheated bond market.
Investor sentiment also hinges on outcomes from a Chinese Politburo meeting, where discussions on potential stimulus measures are anticipated. However, sentiment remains cautious following unsuccessful attempts this year to reverse a property market downturn and revive subdued consumer demand.
“Market sentiment toward China stocks heavily depends on policy developments, but from the Third Plenum to the Politburo, exciting policies have yet to materialize,” noted Steven Leung, executive director at UOB Kay Hian Hong Kong. “Investors are showing reluctance towards Chinese stocks and are likely to further reduce their holdings.”
In the US, the S&P 500 closed slightly higher on Monday, lifted by gains in the “Magnificent Seven” megacap stocks, while the Russell 2000 index of smaller firms declined. Tesla Inc. saw a notable increase following a bullish call from Morgan Stanley, whereas McDonald’s Corp. investors overlooked a sales drop after executives promised new promotional initiatives.
US policymakers, maintaining rates at their highest level in more than two decades for over a year, are expected to leave rates unchanged again on Wednesday. However, investors anticipate signals for a potential rate move in September, amidst concerns about potentially jeopardizing a robust yet moderating job market.
The volatility in July’s stock market has highlighted the complexity of relying on seven large tech companies, which no longer guarantee straightforward gains. Despite speculations that Fed cuts would benefit Corporate America, the S&P 500 faced two consecutive weeks of losses, driven down by its influential technology sector.
In corporate news, BHP Group Ltd. has partnered with Lundin Mining Corp. to acquire Filo Corp., gaining access to copper projects in South America.
Commodities have erased their gains for the year amid a challenging outlook in China, a US natural gas sell-off, and declines in food prices. Gold prices edged lower for a second consecutive day as the dollar stabilized.
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