Asian stock markets commenced the new year with a quiet and lackluster performance, impacted by discouraging economic indicators from China and heightened concerns following a powerful earthquake in Japan.
The markets, exhibiting minimal movements, were influenced by weaker economic data from China and the unsettling earthquake in Japan, which led to a rather flat or downward trajectory across most regional indices. This subdued start was a potential corrective phase following robust gains observed in December, driven partly by expectations of an early Federal Reserve interest rate cut in 2024. Futures of U.S. stocks remained stable during Asian trading on Tuesday.
The devastating earthquake in central Japan, causing significant destruction to residences and disrupting regional train networks, added to the cautious market sentiment. Although the Japanese markets were closed for a week-long holiday, futures for Japan’s Nikkei 225 index indicated a 0.4% decline. Notably, the Nikkei had been the standout performer among major stock indices in 2023, boasting nearly a 30% increase.
In China, stocks continued their underperformance, aligning with their struggles from the previous year, as the latest Purchasing Managers Index (PMI) data reflected ongoing challenges in business activities. The prominent Shanghai Shenzhen CSI 300 index dropped by 1.1%, extending its decline by over 12% from 2023 and hovering close to a five-year low. The Shanghai Composite index slipped by 0.3%, while Hong Kong’s Hang Seng index experienced a notable 1.7% dip, primarily influenced by the downturn in mainland stocks.
The Chinese official manufacturing PMI contracted more than anticipated in December, reinforcing the persistent weakness in the world’s second-largest economy. This weakness was further emphasized by the non-manufacturing PMI, which remained on the brink of contraction.
Although a private survey suggested some resilience in manufacturing activity, it didn’t suffice to offset the sluggish offshore demand for Chinese products. The anticipated post-COVID economic rebound in China failed to materialize in 2023 due to deflationary pressures and sluggish government stimulus efforts, leading to sustained caution among investors and continued outflows from Chinese stocks.
Across broader Asian markets, movements were generally flat to negative, with Australia’s ASX 200 edging up by 0.4%, while South Korea’s KOSPI experienced a minor 0.1% decline.
Futures for India’s Nifty 50 index hinted at a weak start, as the Indian markets were poised for profit-taking following their remarkable performance in 2023. The Nifty remained near record highs despite the expected slight pullback.
The week’s spotlight remained on the awaited release of key economic data from the U.S., particularly the nonfarm payrolls report for December scheduled for Friday. Despite the anticipation, the market sentiment continued to lean towards expectations of early interest rate cuts by the Federal Reserve, with CME’s Fedwatch tool indicating a more than 70% probability of a 25 basis point rate cut in March.
While the market sentiment in December had been bolstered by prospects of early Fed rate cuts, the sustainability of this rally hinges largely on forthcoming U.S. economic indicators.