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Asia shares hit 7-month low on China regulations, U.S. data

China regulations

MSCI’s broadest index of Asia-Pacific shares outside Japan was 2.0% lower to its lowest level since last December

Shares in Asia dropped to their lows for this year on Monday as worries amid tighter regulations in China and strong U.S. corporate earnings.

It was the biggest daily decline in over a year as well, with Chinese blue chips losing 4.4% to their lowest levels since December, as the education and property sectors were routed on worries over tighter government rules.

We believe China’s economy, and specifically its financial system, will face significant risks in coming months due to the unprecedented tightening measures applied to the property sector, economists at Nomura warned in a note.

That dragged MSCI’s broadest index of Asia-Pacific shares outside Japan 2.0% lower to its lowest level since last December. Though Japan’s Nikkei rose 0.9%, it was off a seven-month low.

In contrast, Nasdaq futures were off just 0.1% from historic highs, and S&P 500 futures were 0.3% lower. EUROSTOXX 50 futures and FTSE futures both dipped 0.5%.

More than one-third of S&P 500 companies are set to report quarterly results this week, including Facebook, Tesla, Apple, Alphabet, Microsoft and Amazon.

With just over one-fifth of the S&P 500 having reported, 88% of firms have beaten the consensus of analysts’ expectations. That is a major reason global money managers have poured more than $900 billion into U.S. funds in the first half of 2021.

Oliver Jones, a senior markets economist at Capital Economics, noted U.S. earnings were projected to be roughly 50% higher in 2023 than they were in the year immediately prior to the pandemic, significantly more than was anticipated in most other major economies.

With so much optimism baked in, it seems likely to us that the tailwind of rising earnings forecasts, which provided so much support to the stock market over the past year, will fade, he cautioned.

The week is also packed with U.S. data that should underline the economy’s outperformance. Second-quarter gross domestic product is forecast to show annualised growth of 8.6%, while the Fed’s favoured measure of core inflation is seen rising an annual 3.7% in June.

The Federal Reserve meets on Tuesday and Wednesday and, while no change in policy is expected, Chair Jerome Powell will likely be pressed to clarify what “substantial further progress” on employment would look like.

The main message from Fed Chair Powell’s post-meeting press conference should be consistent with his testimony before Congress in mid-July when he signalled no rush for tapering, said NatWest Markets economist Kevin Cummins. However, he will clearly remind market participants that the taper countdown has officially begun.

So far, the bond market has been remarkably unaffected by the prospect of eventual tapering with yields on U.S. 10-year notes having dropped for a four consecutive week to 1.26%.

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