SINGAPORE — Asian equities weakened slightly on Thursday as soaring COVID cases in China unsettled investors and cast doubt over chances of a swift recovery for the world’s second biggest economy after the relaxation of stringent COVID curbs.
MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.78%, and was set to end the last month of the year in the red, capping a brutal 2022.
Futures indicated the dour mood was likely to continue in Europe, with Eurostoxx 50 futures down 0.24%, German DAX futures 0.30% lower and FTSE futures down 0.36%.
China’s health system has come under heavy stress since Beijing started dismantling its zero-COVID regime at the start of the month.
On Monday, China announced it would end quarantine requirements for inbound travelers on Jan. 8, while several countries, including the United States and Japan, have made COVID tests mandatory for travelers from China.
Around half the passengers on two flights from China to Milan’s main airport, Malpensa, tested positive for COVID on Wednesday.
Nomura analysts said in a note that there could be significant waves of infection across China, spreading from urban to rural areas, during the nationwide travel rush for the Lunar New Year which falls on Jan. 22.
“China may find itself in a difficult situation due to its procrastination on embracing a ‘living with COVID’ approach,” Nomura analysts said, noting that the previous zero-COVID policy could have overprotected people, raising the risk of a surge in infections once the controls were removed.
China shares fell 0.3%, while Hong Kong’s stock market slid 1%. Japan’s Nikkei fell more than 1% to a nearly three month low, while Australia’s resource heavy S&P/ASX 200 index lost 0.94%.
Concerns that central banks’ efforts to tame inflation could lead to an economic slowdown and the uncertainty over how China’s economy will fare following the removal of COVID controls have kept markets subdued.
State Street’s Investor Confidence Index, which analyzes buying and selling patterns of institutional investors, fell to 75.9 in December, the lowest since the pandemic began three years ago.
Marvin Loh, senior macro strategist at State Street Global Markets, said investors’ risk appetite has continued to weaken this month, with the decline most pronounced in North America on growing recessionary concerns.
Investors’ attention was also focused on weekly U.S. jobless claim numbers due later on Thursday.
Markets are now pricing in 69% chance of a 25-basis point rate hike when the U.S. Federal Reserve holds a policy review in February, and they are now looking at U.S. rates peaking at 4.94% in the first half of next year.
The Fed raised interest rates by 50 bps earlier in December after delivering four consecutive 75 bps hikes in the year, but it has said it may need to keep higher interest rates for longer.
PineBridge Investments strategists said the lagged effect of aggressive central bank tightening has left most anticipating a softish recession in the second half of 2023.
“We can’t rule out the possibility that the inflation-spurred spike in corporate profits unwinds sooner, pulling forward job cuts and the recession,” they cautioned.
The yield on 10-year Treasury notes was down 2.2 basis points to 3.864%, not far off six-week high of 3.89%.
The yield on the 30-year Treasury bond was down 2.2 basis points to 3.955%, while the two-year Treasury yield, which typically moves in step with interest rate expectations, was up 0.9 basis points at 4.368%.
U.S. crude eased 0.24% to $78.77 per barrel and Brent was at $83.14, down 0.14% on the day.
In the currency market, the Japanese yen strengthened 0.62% versus the greenback at 133.65 per dollar, while sterling was last trading at $1.2037, up 0.20% on the day.
The dollar index, which measures the dollar against six major currencies, fell 0.038%, with the euro up 0.14% to $1.0623.
(Reporting by Ankur Banerjee; Editing by Simon Cameron-Moore)