Asian markets mostly fall after Fed declines to signal more rate cuts

Posted at 10:46 PM, Jul 31, 2019
and last updated 2019-08-01 00:46:34-04

Asian markets mostly declined on Thursday after the Federal Reserve’s chairman Jerome Powell suggested the quarter-point rate cut on Wednesday was a one-off.

Meantime, the US-China trade talks in Shanghai ended on Wednesday with few signs of progress, while both sides agreed to meet in September again.

Hong Kong’s Hang Seng Index fell 0.8%. The Shanghai Composite Index also lost 0.7%. The two indexes deepened early losses after a private survey showed China’s manufacturing sector contracted for a second straight month.

Australia’s S&P/ASX 200 moved down 0.2%. Taiwan’s Taiex dropped 0.9%. Japan’s Nikkei dropped as much as 1%, before recovering the losses and trading flat. South Korea’s Kospi also reversed early losses and was unchanged from the previous session.

Meanwhile, the US dollar strengthened. The ICE US dollar index, which measures the greenback’s strength against a basket of foreign currencies, rose 0.4%. The dollar also gained against both the Japanese yen and the euro, up 0.4% and 0.3% respectively.

The US central bank on Wednesday cut the federal funds rate by 25 basis points as expected. But Powell suggested it was a one-off move, disappointing investors who had initially expected more rate cuts were coming after the Fed’s first rate cut since 2008.

“We are thinking of it as a mid-cycle adjustment to policy,” Powell said during a press conference Wednesday. “I’m contrasting it with the beginning of a lengthy cutting cycle.”

Wall Street tumbled following Powell’s remarks. By the end of Wednesday, the Dow declined 1.2%, the S&P 500 fell 1.1%, and the Nasdaq settled 1.2% lower.

“The minimal size of the cut, the dissents, and Powell’s press conference disappointed markets, and undercut our expectation,” said Morgan Stanley analysts in a research report. “Powell’s statement that the cut was ‘in the nature of a mid-cycle adjustment to policy’ provided little dovish guidance for future policy moves.”

“Following the drag from the jitters over US-China trade, Asia markets look to remain in a state of gloom for the second day on the back of the Fed disappointment,” said Jingyi Pan, a strategist for IG Group.

The White House said Wednesday in a statement that the two sides held “constructive” talks over topics such as “forced technology transfer, intellectual property rights, services, non-tariff barriers, and agriculture.” China’s Ministry of Commerce, meanwhile, said in a separate statement that the trade negotiators had “honest, efficient, and constructive in-depth communication” over major issues and that China will buy American agricultural products based on its needs.

Here are some of the other big talking points on Asian markets at 12:30 p.m. Hong Kong time.

  • China’s factory activity contracted again in July, according to a private survey on Thursday. The Caixin China Manufacturing Purchasing Managers’ Index, a closely watched gauge of China’s manufacturing sector, came in at 49.9 for July. The figure was slightly better than market expectations and up from June’s 49.4, but still below the 50 mark that separates contraction from expansion.
  • On Wednesday, China’s official manufacturing PMI came in at 49.7 for July, indicating the third consecutive month of contraction. The official PMI reflects more big businesses and state-owned enterprises, while the private Caixin/Markit PMI surveys a bigger number of private businesses.
  • Hong Kong’s Monetary Authority, the city’s de facto central bank, cut the base lending rate by 25 basis points on Thursday, following the Fed’s move overnight. It was the authority’s first rate cut since 2008. Hong Kong’s monetary policy moves in lockstep with the Fed’s as the city’s currency is pegged against the dollar.
  • Hong Kong announced Wednesday its economy grew 0.6% for the second quarter, weaker than markets had expected, hurt by the US-China trade war and a global economic slowdown. Analysts warned the slowdown could deepen if the city’s massive protests continue.
  • South Korean exports fell 11% in July, the eighth straight monthly decline, official statistics showed Thursday. Semiconductor exports dropped 28%. Samsung Electronics dropped 0.2% in the morning trade, following a more than 2% decline on Wednesday.