Hang Seng Index Drops on China Market Fears; Nikkei Gains on Weak Yen

US Markets Dip Amid Tariff Uncertainty and Geopolitical Tensions

US equity markets fell on Thursday, March 20, partially reversing gains from March 19. Investor concerns over tariff policies and the US economy resurfaced while rising tensions in the Middle East added to risk aversion.

The Nasdaq Composite Index and the S&P 500 declined by 0.33% and 0.22%, respectively, while the Dow slipped 0.03%.

On Thursday, reports of Israeli airstrikes on Gaza and fresh US sanctions on Iran weighed on sentiment, pushing crude oil prices higher.

Meanwhile, central banks, including the Bank of England, contributed to market uncertainty about tariffs, impacting risk sentiment. Higher tariffs could drive US import prices and inflation higher, possibly delaying Fed rate cuts and slowing growth.

In the bond markets, 10-year Treasury yields dipped below 4.2% before recovering to close at 4.241%.

US Labor Market and Manufacturing Weakness Raise Concerns

US initial jobless claims increased from 221k (week ending March 8) to 223k (week ending March 15). The four-week average also rose, signaling a potential softening in the US labor market. A softer labor market may impact wage growth and consumer spending, which accounts for over 60% of US GDP.

Nick Timiraos, Chief Economics Correspondent for the Wall Street Journal, commented:

“The jobless claims data continue to show a picture of a somewhat less tight labor market compared to the last few years, but not one that is imminently getting meaningfully weaker.”

Meanwhile, the Philly Fed Manufacturing Index fell to 12.5 in March, down from 18.1 in February. Significantly, the future new orders index for future general activity tumbled 31 points to its lowest reading since May 2023. Timiraos shared additional insights:

“The drop of -32.9 points over the last two months is the largest two-month decline in the share of those saying they expect future new orders to increase in any two-month period going back to the start of the data in 1968.”

Asian Market Implications: Thursday’s US data and market session signaled a cautious Friday, March 21 session.

Japan Inflation Cools, Tempering BoJ Rate Hike Bets

Japan’s inflation figures eased bets on a July Bank of Japan rate hike. The annual inflation rate eased to 3.7% in February, down from 4% in January. Core inflation also softened from 3.2% to 3.0%. Softer inflation dampened Japanese Yen demand, pushing USD/JPY up 0.16% to 149.012.

Hang Seng Index and Mainland China Markets Extend Losses

In Asia, the Hang Seng Index extended its losses from Thursday, dropping 1.60% on Friday morning. Real estate and tech stocks continued to slide after Bank of America warned of a potential market correction.

• The Hang Seng Technology Index tumbled 2.37%, while the Hang Seng Mainland Properties Index dropped 2.08%.
• Tech giants Alibaba (09988.HK) and Baidu (09888.HK) fell 2.73% and 2.29%, respectively.

Beijing’s silence on fresh stimulus measures also impacted investor sentiment. CN Wire reported:

“PBoC-backed China Financial News: Experts see no urgency for LPR (Loan Prime Rate) cuts as economic momentum and policy measures stabilize. The People’s Bank of China kept the Loan Prime Rates unchanged on March 20, with the one-year at 3.1% and the five-year rate at 3.6%”

Mainland China’s equity markets also trended lower, with the CSI 300 and Shanghai Composite Index falling 0.78% and 0.59%, respectively.

Nikkei Index Advances as Inflation Cools and Yen Weakens

The Nikkei Index advanced 0.37% on Friday morning, supported by February’s inflation numbers and a weaker Japanese Yen. A weaker Yen enhances the competitiveness of Japanese exports, improving corporate earnings prospects.

Key stock gainers: Sony Corp. (6758) rallied 2.74%, with tech stocks Softbank Group (9984) and Tokyo Electron (8035) gaining 2.32% and 1.22%, respectively.

ASX 200 Advances on Banking and Mining Sector Gains

Meanwhile, Australia’s ASX 200 extended its gains from Thursday, rising 0.52% on Friday, brushing off overnight US equity losses. Banking and mining stocks led the gains.

• Banking stocks: ANZ (ANZ) and National Australia Bank (NAB) advanced by 0.96% and 0.97%, respectively. Falling 10-year US Treasury yields boosted demand for high-yielding Aussie banks.
• Mining giants BHP Group Ltd. (BHP) and Rio Tinto Ltd. (RIO) rose 1.15% and 1.48%, respectively. Iron ore spot prices increased for the first time in five sessions on March 20, bolstering demand for mining stocks.

Outlook: Key Risks and Opportunities

Global markets remain highly sensitive to monetary policies and macroeconomic factors:

• US-China Trade Tensions: Renewed trade disputes could dampen investor sentiment, possibly prompting Beijing to introduce further monetary and fiscal stimulus.
• China’s Stimulus Measures: Fresh policy support could boost Hong Kong and Mainland-listed stocks.
• Central Bank Forward Guidance: Policymakers’ stance remains crucial amid tariff and inflation uncertainties.

While geopolitical risks persist, China’s stimulus efforts and innovation drive could support regional equities. Further consumer-focused stimulus may help offset US recession concerns, potentially lifting demand for Hong Kong and Mainland Chinese stocks.

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