Hong Kong: Asian stocks retreated on Tuesday as investors booked profits a day after China’s weekend decision to give its currency more flexibility triggered a risk rally.
China’s move on the yuan had set off optimism that a stronger yuan would lift its purchasing power for foreign goods such as commodities, a boon to the global economy given the nation’s vast appetite for raw materials.
But that euphoria was checked as investors took a more considered view on the impact the move would have on economic fundamentals.
“The potential boost that might be given to consumption is likely to be subtracted from what will happen to exports,” said Emil Wolter, head of regional strategy at Royal Bank of Scotland.
“But the bottom line is that the market is making a huge deal of an insubstantial occurrence,” he said, adding that the yuan move had triggered a rally because it came after stocks registered their worst May in 12 years and at a time when there were large short positions.
“Sell in May and go away” is an old stock market adage which refers to the seasonal weakness in shares.
Beijing set the mid-point for the yuan’s daily trading range at a 5-year high on Tuesday, which gave the markets a brief respite from the selling but kept most indexes in the red.
On Tuesday, the MSCI index of Asia Pacific ex-Japan stocks was down 0.7%, hovering around the day’s lows. Losses in technology and resources provided the main drag.
China’s central bank set the yuan’s daily mid-point at 6.7980 against the dollar on Tuesday, the highest level since the yuan’s revaluation in July 2005, signalling it could allow the yuan to rise further.
Spot yuan rose to as high as 6.7900 in early trade, up 0.11% from the close on Monday, when it jumped 0.42%. But by mid-day it was down 0.17%.
Tuesday’s fixing initially reignited demand for riskier currency trades, with the Australian dollar and the euro jumping to the day’s high against the dollar. But that rise was short-lived and by noon the euro dipped 0.1% to $1.2298.
The Australian dollar rose as high as $0.8834, up from around $0.8765 just before the mid-point was announced. The Australian dollar then dipped to $0.8782, up 0.23% on the day.
Financial markets have also turned cautious ahead of Britain’s budget which will be announced later on Tuesday.
As the sovereign debt crisis spreads through Europe, rating agencies have warned even Britain’s triple-A status could be at risk if the finance minister’s plans to cut the record deficit are found wanting.
“Investors are growing more cautious on the view that the magnitude of the yuan’s new flexibility may not be as big as the market had earlier hoped,” said Lee Sun-yeb, a market analyst at Shinhan Investment Corporation in Seoul.
“It seems the market is taking a bit of breather following its recent sharp gains, as it nears the earlier high. Foreign buying has also halted.”
Japan’s Nikkei share average was down 1%.
The Korea Composite Stock Price Index fell half a% as foreigners dumped shares amid growing risk aversion. Foreign investors turned sellers on Tuesday snapping their seven-session buying streak.
Oil prices fell 0.8% toward $77 on speculation that a gradual appreciation of the yuan would have a limited impact on China’s petroleum imports in the short term.
China’s stock market, one of the world’s worst performers this year, managed to cling on to gains after the previous day’s surge. The Shanghai Composite Index was up 0.3%, after rising 2.9% on Monday to its highest close in 3 weeks.
And analysts expect more volatility ahead as the central bank’s move comes a day after it kept the mid-point unchanged.
“The authorities want to say they are showing a more hands off approach and more flexibility in the markets but the reality is they are introducing more intraday volatility in the market,” said Craig Chan, senior FX strategist at Nomura International.