Gap between Asia and world markets widens

A woman walks past a man examining an electronic board showing Japan’s Nikkei average and stock quotations outside a brokerage, in Tokyo, Japan, March 20, 2023. REUTERS/Androniki Christodoulou

Whatever is driving Wall Street higher – the finishing line of the Fed’s rate-hiking cycle, a falling dollar or strong earnings – it is not really filtering through to Asian markets.

The disconnect between Asia and the rest of the world has widened recently, and correlations between the MSCI Asia ex-Japan index and leading U.S. and global indexes are the weakest in about a month.

A solid batch of second quarter earnings from some of the largest U.S. banks and financial firms on Tuesday kept the U.S. stock market juggernaut rolling. Bulls in Asia will be hoping some of that momentum drives local trading on Wednesday.

There is certainly room for catch up.

The MSCI Asia equity index ex-Japan is up 4.6 percent this year, significantly underperforming the MSCI World index, S&P 500 and Nasdaq which are up 17 percent, 19 percent and 38 percent, respectively.

READ: Americans bumped up spending in June

Figures on Tuesday showed that U.S. retail sales in June were weaker than expected, but any concern about what that signals for the health of the economy was washed away by solid earnings at Bank of America, Bank of New York Mellon and others.

As ever, China is the heaviest drag on Asia.

READ: China’s Q2 GDP growth slows to 0.8% q/q, raises stimulus expectations

Disappointing second quarter growth figures this week pushed the Chinese economic surprises index to its lowest in more than three years. Excluding the pandemic, the index is at its lowest since 2015 just before Beijing’s shock mini yuan devaluation.

The economy’s sluggishness is even raising the prospect that China may be entering an era of much slower economic growth, and may never get rich.

Whether it chugs ahead at 3 percent to 4 percent annually or flirts with Japan-like “lost decades” of stagnation, it looks set to disappoint its leaders, its youth and much of the world.

More immediately, the whole gamut of U.S.-China tensions is back on investors’ radar – climate, defense and security, and semiconductors and tech.

READ: World needs stable US-China ties, says Xi

U.S. climate envoy John Kerry is in Beijing for a three-day visit, China’s defense minister Li Shangfu met veteran U.S. diplomat Henry Kissinger, and U.S. chip company executives met with top Biden administration officials to discuss China policy.

In Thailand, meanwhile, parliament convenes on Wednesday to choose a new prime minister. Pita Limjaroenrat led his Move Forward party to election victory in May but failed last week to win the required backing of more than half of the legislature.

Ahead of the vote, the Thai baht surged 1.6 percent on Tuesday to a two-month high against the dollar. It was the currency’s best day since November.