Hong Kong: Asian stocks rose on Monday as investors bet that China’s latest round of policy tightening won’t dent prospects of a global economic recovery while the euro weakened on a broad wave of profit-taking.
China on Sunday raised banks’ reserve requirements for the fourth time this year. The move was not a surprise as market players had predicted more tightening after last week’s data showed an acceleration in inflation.
Beijing’s latest policy action is a sign that authorities across the region are intensifying their battle, using interest rate increases and strengthening currencies, to rein in imported inflation due to rising commodity prices.
Singapore sanctioned an increase in the value of its currency last week while the Bank of Thailand is likely to raise interest rates at a review on Wednesday.
In a sign that Beijing’s latest action was well anticipated, both Chinese and Hong Kong stocks were trading higher on the day after opening lower.
Shanghai has been the best performing stock market so far this year with gains of about 9% as authorities have repeatedly raised reserve requirements and increased rates. In contrast, India’s troubles in tackling inflation have seen that market decline by 5.5% on a year-to-date basis.
Elsehwere, Japan’s Nikkei dipped, weighed by declines in telecommunications shares. Outside Japan, MSCI’s index of Asia Pacific shares edged higher. Korean shares hit another record high.
With stronger currencies being used as a weapon to tackle inflation, investors are adding exposure to the Chinese yuan and the Singapore dollar and have turned bullish on the South Korean won’s outlook .
PIMCO, the world’s biggest bond fund manager, said the yuan and the won are “fundamentally undervalued”.
The euro suffered broad losses as a raft of bad news in the form of Finland’s anti-euro party making big gains in a parliamentary election on Sunday and talk of a Greek debt restructuring prompted traders to take profits into a recent rally.
“This probably mostly has to do with market sentiment. In the end, I think what it probably boils down to is that there are still some long positions in the euro,” said Koji Fukaya, director of global foreign exchange research for Credit Suisse Securities in Tokyo, referring to the euro’s drop.
But the common currency is expected to be supported by prospects of another interest rate hike after the recent quarter point increase, as data showed euro zone inflation climbed higher than expected in March.
In contrast, the Fed is expected to continue with its ultra easy policy stance, encouraging investors to search for high-yielding currencies elswhere.
In commodities, gold rose to yet another record high, building on four consecutive weeks of gains, powered by rising inflation pressures and a weakening dollar. Holdings in the SPDR Gold Trust , the world’s largest gold-backed exchange-traded fund, rose too.
US crude futures headed lower towards $109 a barrel as traders took profits after three days of gains despite comments by Saudi Arabia confirming a cut in crude production to counter an oversupplied market. Prices have retreated slightly after hitting a 2-1/2 year peak of $113.46 earlier this month.
London copper prices briefly dropped half a% while Shanghai copper prices also dipped slightly after Beijing’s latest round of tightening.
Notwithstanding the commodities rally, US Treasury yields declined as recent data showed underlying US inflation pressures remained subdued. Ten-year yields edged a basis point lower to 3.40% after falling 9 basis points on Friday.