Asian stocks rallied as concerns about China grow

HONG KONG / WASHINGTON (Reuters) – Asian stocks returned earlier gains on Tuesday, weighted by Chinese markets as investors took gains on a recent rally in some mainland companies, though falling inflation fears helped bolster broader sentiment in the region .

Investors are now waiting for a closely watched Congressional appearance by Jerome Powell, US Federal Reserve Chairman and Treasury Secretary Janet Yellen later today.

MSCI’s widest index of Asia-Pacific stocks outside Japan fell 0.57%, hurt by a 1.5% drop in Chinese blue chips.

Gary Ng, an economist at Natixis, said Chinese stocks have recently been ahead of other Asian markets, meaning they were ready for some correction.

Nightly announcements of new sanctions did not help Chinese equities either, although analysts said markets had become quite accustomed to such developments.

The United States and others, including the European Union, on Monday sanctioned Chinese officials for human rights violations in Xinjiang, and Beijing has retaliated with punitive measures against European lawmakers, diplomats, institutions and families.

Jin Jing, an analyst with China Fortune Securities, said sanctions hurt risk appetite, especially for foreign investors, who sold shares through Stock Connect.

Persistent concerns about policy tightening at home also continued to weigh on high-flying sectors and stocks with high valuations as investors became cautious.

Outside of China, Asian stocks were mixed after Wall Street’s gains on Monday as investors cheered for a break in the recent hike in bond yields.

The Dow Jones Industrial Average rose 0.32%, the S&P 500 gained 0.70% and the Nasdaq Composite rose 1.23%.

Developed markets and emerging Asia also managed to absorb a surprise move by the Turkish president to replace the central bank governor with a critic of high interest rates.

“It doesn’t look like you’re going to see much contagion from Turkey,” said Alex Wolf, head of investment strategy for Asia at JP Morgan Private Bank, citing “fairly strong flows into Asia.”

“Investors view emerging markets less as one giant block.”

Benchmark 10-year notes tipped slightly, most recently up 1.6857%, but fell from 1.732% late on Friday.

“US risk assets were helped by a drop in government bond yields every other week. Yield movements will be closely watched this week amid a series of US Treasury auctions and testimonials from Treasury Secretary Yellen and Fed Chairman Powell, ”ANZ Research said in a daily note.

Fed Chairman Powell said in comments prepared for a congressional hearing on Tuesday that the US recovery “has progressed faster than widely expected and appears to be strengthening.”

Against a basket of six major currencies, the dollar index was nearly flat at 91,853 in early Asian trading, after falling 0.32% on Monday.

But oil fell on ample supply and concerns that new pandemic curbs and slow vaccine adoption in Europe will slow the recovery in fuel demand.

US West Texas Intermediate crude oil futures were down 1.28% and Brent crude oil futures were down 1.27%.