Hong Kong — Asia stocks rose on Wednesday, encouraged by a rally on Wall Street, but gains were kept in check by worries that aggressive central bank policy tightening will stifle global growth and raise the risks of stagflation.
The World Bank on Tuesday slashed its global growth forecast by nearly a third to 2.9% for 2022, warning that Russia’s invasion of Ukraine has compounded the damage from the Covid-19 pandemic, and many countries now faced recession.
Nevertheless, US stocks rallied to end higher for a second straight day, buoying the mood in Asia.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.15%, recouping most of its losses in the previous session, while Japan’s Nikkei 225 index was up 1%.
Australia’s S&P/ASX 200 index rose 0.72%, recovering half of its slide on Tuesday after the central bank unexpectedly raised interest rates by the most in 22 years and flagged more tightening to come.
India’s central bank is also expected to raise rates later in the day (4.30am GMT) in a bid to tame hot prices, with more hikes being priced in.
On Thursday, the European Central Bank (ECB) meets and markets are expecting it to at least lay the groundwork for rapid rate rises, if not begin them with a small hike.
“I think the hikes coming from the central banks, or the front-loading is actually positive, because it will allow us to kind of curb inflationary pressures,” said Trinh Nguyen, senior economist at Natixis in Hong Kong, adding markets could be correcting from Tuesday’s “overreaction”.
“But I wouldn’t say that it’s a reversal, unless a change of data will tell us otherwise,” Nguyen said.
US Treasury Secretary Janet Yellen told senators on Tuesday that she expected inflation to remain high and the Biden administration would likely increase the 4.7% inflation forecast for this year in its budget proposal.
Chinese stocks were supported by hopes its economy is slowly getting back on track as strict Covid-19 lockdowns are relaxed. Hong Kong’s Hang Seng index rose 1.22%, while China’s benchmark index CSI300 edged up by 0.47%.
“The bounce in risk sentiment is due to a more positive China tilt where the outlook is set to brighten up as Covid-19 restrictions ease, and state-owned banks are obliged to increase lending again,” Stephen Innes, Managing Partner at SPI Asset Management said in a note.
In currencies, the yen hit a fresh 20-year low vs the dollar at 133 and slipped to a seven-year trough against the euro as traders awaited the ECB meeting, which is likely to leave Japan alone among its major peers in sticking to ultra-easy monetary policy.
The US Federal Reserve is expected to raise its benchmark funds rate by 50 basis points (bps) next week and again in July.
The US benchmark 10-year yield was 2.992%, having edged down from a four-week high of 3.064% on Tuesday after Target Corp warned about excess inventory and said it would cut prices, offering some relief to those who think inflation may be peaking.
Brent futures rose 0.11% to $120.72 a barrel and US West Texas Intermediate (WTI) CLc1 futures gained 0.23% to $119.66.
Spot gold XAU was down 0.18% at $1,849.1 per ounce.