Asian equity markets may adopt a defensive stance in light of recent short-term volatility in US equities and US-listed Chinese stocks. Market participants, concerned about the US debt ceiling and mixed global data releases, are keeping a close eye on credit and foreign exchange (FX) markets. As risk-off sentiments permeate the markets, short-term cash positions are increasingly popular, signalling a dash-for-cash mentality. Chinese bond yields and currency further underscore this trend. The Chinese 10-year bond yield dipped slightly, reflecting this defensive action. The US dollar, strengthening against the Chinese yuan with the USD/CNH nearing year-to-date highs around the 7.00 mark, could emerge as a lead risk indicator.
Defensive strategies may gain ground as recession fears stir amongst market participants. Recent Chinese economic data pointing to a slower-than-expected recovery, falling short of consensus estimates, are adding to these concerns. Despite some rebound in consumer spending, there are mounting concerns that the bulk of China’s recovery may already be in the rear-view mirror. Global challenges that could hinder a resurgence in Chinese exports further layer on the uncertainty. In response, leading Wall Street banks, including JP Morgan and Barclays, have downgraded their 2023 GDP growth forecasts for China. Given this gloomy forward activity outlook for China, investors may begin to rebalance their cyclical exposure in Asia, reflecting a more bearish sentiment on China’s economic prospects.
