Divergence Between Asia-Pacific Shares, US Stock Market Opens Door to Volatility

The major Asia stock markets are diverging with the U.S. equity markets overnight suggesting global investors may need to begin bracing for a volatile week.

Hong Kong stocks are leading the gains in the Asia-Pacific region early Monday as China’s trade data fell far short of expectations, marking the first annual decline in exports since May 2020. Meanwhile, U.S. stock futures fell on Sunday as investors looked ahead to a week packed with the Congressional mid-term elections, as well as the latest consumer inflation report.

Asia-Pacific Performance

At 05:00 GMT, Japan’s Nikkei 225 Index is trading 27540.34, up 340.60 or +1.25%, Hong Kong’s Hang Seng Index is at 16714.57, up 553.43 or +3.42% and Korea’s KOSPI Index is trading 2371.73, up 23.30 or +0.99%.

In China, the Shanghai Index is at 3084.87, up 14.08 or +0.46% and in Australia, the S&P/ASX 200 Index is at 6927.40, up 34.90 or +0.51%.

China’s October Exports Marks First Year-on-Year Drop Since May 2020

China’s exports in U.S. Dollar terms fell 0.3% in October from a year earlier, significantly missing expectations for an increase of 4.3% in a Reuters poll and a steep decline from 5.7% growth in September.

Imports also fell 0.7%, missing forecasts for a 0.1% gain from a year earlier after rising 0.3% in September.

The decline in U.S. Dollar terms last month marked the first year-on-year drop since May 2020, according to Refinitiv Eikon data.

China’s Restrictive COVID Policy is the Wildcard

Last week, Chinese and Hong Kong investors pumped a trillion dollars into the market on hopes of a reopening in the world’s second-biggest economy.

There’s going to be a big payoff if they are right, but over the weekend, Chinese official reiterated their commitment to a strict COVID containment approach, dashing hopes for a quick re-opening of the economy.

China will persevere with its “dynamic-clearing” approach to COVID-19 cases as they emerge, health officials said on Sunday.

Asian Investors Betting on Easing of COVID Curbs, US Investors Taking Protection Ahead of Elections

Today’s price action suggests traders should prepare for heightened volatility because of the divergence in the Asian and U.S. equity markets.

While we realize that reopening of the economy in China and the easing of COVID restrictions is likely to be a bullish event, or as Goldman Sachs stated in a note to clients “Chinese stocks could rally 20% on and before the reopening”, there are other headwinds in the global economy that could derail the rally.

In the U.S., for instance, investors will be focusing on the mid-term elections and their potential impact on U.S. economic policy. And Thursday’s consumer price inflation (CPI) report that is likely to play a major role in the direction of Fed policy.

Even if China were to relax its restrictions 2 or 3 months down the road, there is still the possibility that China’s economic growth next year could fall on expectations of falling demand from the U.S. and the European Union. This could trigger a drop in China exports in the neighborhood of 2% or more.