Asian stocks fell slightly on deflationary risks in China, and banking jitters

SYDNEY (Reuters) – Asian stocks were on the defensive on Wednesday after data showed that China slid into recession in July, a negative indicator for the outlook for global economic growth although it may help curb inflationary forces worldwide.

European futures were higher across the board, with EUROSTOXX 50 futures up 0.9% and FTSE futures 0.5%, after Italy said its new taxes on banks would not exceed 0.1% of total assets, calming nerves.

S&P 500 futures rose 0.1% while Nasdaq futures rose 0.2%.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) rose 0.2%, after falling 1.2% a day earlier. Japan’s Nikkei (.N225) declined 0.4%.

Closely watched China data on Wednesday showed that consumer prices fell 0.3% in July from a year ago, the first drop since February 2021, although it was slightly better than expectations for a 0.4% drop. Producer prices fell for the tenth consecutive month.

The data came after disappointing trade numbers the previous day that raised concerns about the global economic outlook.

“Although the headline CPI and PPI point to a deflationary story, the pressure is not significant,” said Gary Ng, chief economist for Asia and the Pacific at Natixis. “It is unlikely that you will see China enter a full deflationary path because core CPI remains resilient and services-driven.”

“Having said that, if we don’t see a further improvement in consumer confidence, we could see deflationary risks rising in China.”

China’s blue-chip stocks (.CSI300) and Hong Kong’s Hang Seng Index (.HSI) both fell 0.3%. Reuters reported that the onshore Chinese yuan moved away from a three-week low, and settled at 7.2084 per dollar, aided by dollar selling by the country’s banks.

Hong Kong-listed Chinese property developers (.HSMPI) fell 0.6% after falling 4.8% a day earlier, as concerns persisted about the sector, a key pillar of economic growth.

“With the current situation, policy makers are finally starting to embrace easing and we believe that these efforts will continue until there are clear signs of improvement in aggregate demand,” said Chetan Ahiya, chief economist for Asia at Morgan Stanley.

“But we recognize lessons from the past that if policies are tightened prematurely in early signs of recovery, it increases the risk of falling into a debt deflationary cycle.”

Brazil is also experiencing headwinds for inflation, with consumer prices falling more than expected in the month through mid-July. The central bank cut interest rates by 50 basis points last week.

Overnight, Wall Street ended lower in a broad sell-off after downgrades of several lenders by Moody’s reignited concerns about the health of US banks and the economy. The Dow Jones (.DJI) fell 0.5%, the S&P 500 (.SPX) lost 0.4%, and the Nasdaq Composite (.IXIC) fell 0.8%.

The Italian government shocked the markets on Tuesday by imposing a one-time 40% tax on the profits banks make from higher interest rates, sending regional bank shares (.SX7E) down 3.5%.

It later said the new tax would not exceed 0.1% of total assets.

Long-term Treasury yields fell further in Asia after strong interest in the $42 billion three-year Treasury sale. 10-year yields fell 3 basis points to 3.9981%, after falling 5 basis points overnight to 3.9840%, a one-week low.

The 2-year rate-sensitive yield fell 1 basis point at 4.7450% ahead of Thursday’s US inflation report. Economists expect the core rate of inflation to have picked up slightly in July to an annual pace of 3.3%, while the core rate is seen unchanged at 4.8%.

The US dollar gave up some of its overnight gains at 102.39 against a basket of currencies. The risk sensitive Australian dollar broke a major support level overnight before bouncing back to $0.6553.

Elsewhere, oil prices have been marginally lower. Brent crude futures fell 0.2% to $86.00 a barrel, and US West Texas Intermediate crude futures fell 0.2% to $82.73.

The price of gold rose 0.3% to $1930.18 an ounce.

Prepared by Stella Keough. Additional reporting by Elaine Zhang in Beijing. Editing by Jamie Freed, Edmund Kellman and Simon Cameron-Moore

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