Hong Kong: Chinese stocks tumbled 5% to a three-month low on Monday, weighing on Asian stocks and sapping investor willingness to put money at risk, while the yen rose sharply after Japanese voters swept the opposition into power.
The election results, while widely anticipated, sparked some short-term buying of yen on hopes that new policies will support consumer spending in an economy trapped in deflation and haunted by a weak growth outlook, though domestic stocks slipped on exporter weakness.
Outside of Japan, volatility in Shanghai, a market largely closed to foreigners, has curbed risk taking and has been weighing on the Australian dollar, which with its relatively high yields is a common target for investors searching for bigger returns.
Shanghai-listed shares dropped 5.4% on the day, racking up losses of 21% in August and falling below the 125-day moving average, what is viewed by many domestic investors as the threshold between bear and bull markets.
Fears that banks will rein in their lending after a torrid first six months of the year and an abundance of supply of new shares have been pushing Chinese shares lower for the last month, often weighing on global investor sentiment about holding riskier assets.
US stock futures were down 0.55% indicating a soft open on Wall Street later in the day, while Treasury futures were up 0.2%.
Shares of Bank of China, the country’s biggest foreign exchange lender, were down 3.1% and the top drag on the market. Hong Kong’s Hang Seng dropped 2.2% to a one-month low in sympathy with Shanghai.
Tokyo’s Nikkei share average slashed early gains that were led by buying of futures and fell 0.35%. Large exporters Canon Inc and Honda Motor Corp were among the biggest drags on the Nikkei.
The MSCI index of Asia Pacific stocks traded outside Japan slid 1.4%. The selling was most pronounced in the telecommunications, energy and materials sectors.
Asian stocks are trading at a price-to-book valuation of 1.1 times, above the 30-year average of 0.7 times and around the same level at the peak of the last bull market.
Investors since March had been justifying the premium based on the region’s growth prospects and its speedy recovery. However, the Asian stock rally sputtered in July and August for two reasons, according to Mark Matthews, Asia Pacific strategist with Fox-Pitt Kelton ini Hong Kong.
“The first is that the US in particular and the developed world in general are experiencing economic recoveries that are more robust than previously expected. The second is that there is policy shift in China, and even the doves there are happy that asset prices are no longer rising quickly,” he said in a note.
In the currency market, the yen got an early boost on the clear-as-day election result, which eliminated any uncertainty about Japan’s political leadership. The sharp selloff in Shanghai equities also supported the yen as dealers sought a safe haven.
The US dollar fell 0.9% to 92.60 yen the lowest since 13 July, and the euro dropped 1.1% to 132.24 yen.
“The DPJ (Democratic Party of Japan) may favour the consumer more, which ultimately could be favourable for the economy, but that’s a long-run thing,” said Stephen Roberts, an economist at Nomura in Sydney.