July 18 2024: Asian equities fell sharply on Thursday, led by a sell-off in chip stocks as investors grew increasingly concerned about escalating trade tensions between the U.S. and China. Meanwhile, the Japanese yen firmed after reaching a six-week high, following suspected interventions by Tokyo.
The U.S. dollar remained near its weakest level in four months against a basket of currencies, as comments from Federal Reserve officials reinforced expectations for a rate cut in September, keeping gold prices near record highs.
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.63%, with a sub-index of IT stocks down 2.5%. Tech-heavy South Korean shares fell 1.5%, and Taiwan stocks were down 2%. The yen’s strength and the sharp decline in chip stocks pulled Japan’s Nikkei down more than 2%.
A report that the United States was considering tighter restrictions on exports of advanced semiconductor technology to China triggered a sharp sell-off in chip stocks, with the Nasdaq tumbling overnight.
“I think this volatility spike is now leading to some broader risk reduction as investors worry about stretched positioning,” said Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management.
European markets were set for a mixed open, with Eurostoxx 50 futures 0.14% lower, German DAX futures little changed, and FTSE futures up 0.5%. Investor attention is focused on the European Central Bank’s policy decision later in the day, where the central bank is expected to maintain its current stance. However, comments from officials will be crucial in gauging the timing of the next rate cut.
Broader risk sentiment also took a hit after Republican presidential candidate Donald Trump said on Wednesday that Taiwan “did take about 100% of our chip business” and should pay the U.S. for its defense, as it does not provide anything in return.
Chinese stocks wavered as investors awaited policy news from a key leadership meeting in Beijing. The Shanghai Composite index was down 0.12%, while the blue-chip CSI300 index edged up 0.12%.
Rate Cut Bets
Investors are fully pricing in a 25 basis point rate cut in September after Federal Reserve officials indicated on Wednesday that the U.S. central bank was “closer” to reducing interest rates, citing progress in inflation easing closer to its 2% target. This has left the dollar struggling, with the euro steady at $1.093425, close to the four-month high it touched on Wednesday. Sterling was last at $1.3001, just below the one-year peak breached in the previous session.
The dollar index, which measures the U.S. currency against six peers, was 0.1% higher at 103.78, not far from the four-month low of 103.64 it touched on Wednesday.
The yen hit a six-week high against the dollar at 155.375 in early trading after a sharp rise on Wednesday, leading traders to suspect that Japanese authorities had once again intervened to support the currency. It was last at 156.
Bank of Japan data suggested Tokyo may have bought nearly 6 trillion yen last week to lift the frail yen away from the 38-year lows it had been rooted to since the start of the month. The yen has dropped 9.5% against the dollar this year due to the wide interest rate difference between the U.S. and Japan, creating a lucrative trading opportunity known as the carry trade, where traders borrow the yen at low rates to invest in dollar-priced assets for a higher return.
Analysts believe that last week’s suspected interventions by Tokyo might lead to traders unwinding some of their positions.
“It feels like the tide is shifting a little here and it’s generating some discomfort for yen-funded carry traders,” said James Athey, fixed income portfolio manager at Marlborough Investment Management.
Commodities
In commodities, gold rose 0.34% to $2,466.62 per ounce, just below the record high of $2,483.60 touched on Wednesday. Oil prices also increased, with Brent futures 0.4% higher at $85.45 a barrel, and U.S. West Texas Intermediate (WTI) crude gaining 0.7% to $83.43.
