Asian stock markets face slight pressure renewed geopolitical risks, hawkish Fed bets
- Asian stock markets start the week on a cautious note amid renewed Middle East tensions.
- The exchange of attacks between the US and Iran has pushed oil prices higher.
- Hawkish Fed bets accelerate as Fed’s Warsh reiterates high inflation risks.
Asian equity markets remain under pressure at the start of the week, as risk sentiment turns sour due to renewed tensions in the Middle East and a sharp increase in Federal Reserve (Fed) interest rate hike expectations.
At the time of writing, Nikkei225 is down 0.25% to near 66,250, Hang Seng decline 0.36% slightly below 22,500. However, Chinese stock markets are positive upto 0.7%, and KOSPI rises 0.46% at around 6,820.
Tensions between the United States (US) and Iran have revived as Iran retaliates by attacking US bases in Jordan after Washington struck Iranian rocket launchers that were preparing to send mines into the Strait of Hormuz, Bloomberg reported.
This has resulted in a sharp increase in oil prices. At press time, the WTI Oil price trades 2.5% higher to near $84.85.
Higher oil prices bode poorly for various Asian economies, given their significant reliance on oil imports to meet their energy needs.
Meanwhile, remarks from Fed Chair Kevin Warsh at the Jackson Hole Symposium that the central bank is committed to bringing price pressures down have lifted hawkish Fed bets.
According to the CME FedWatch tool, the odds of the Fed leaving interest rates again in the September meeting have diminished to 39.4% from almost 60% seen a week ago.
Asian stocks FAQs
Asia contributes around 70% of global economic growth and hosts several key stock market indices. Among the region’s developed economies, the Japanese Nikkei – which represents 225 companies on the Tokyo stock exchange – and the South Korean Kospi stand out. China has three important indices: the Hong Kong Hang Seng, the Shanghai Composite and the Shenzhen Composite. As a big emerging economy, Indian equities are also catching the attention of investors, who increasingly invest in companies in the Sensex and Nifty indices.
Asia’s main economies are different, and each has specific sectors to pay attention to. Technology companies dominate in indices in Japan, South Korea, and increasingly, China. Financial services are leading stock markets such as Hong Kong or Singapore, considered key hubs for the sector. Manufacturing is also big in China and Japan, with a strong focus on automobile production or electronics. The growing middle class in countries like China and India is also giving more and more prominence to companies focused on retail and e-commerce.
Many different factors drive Asian stock market indices, but the main factor behind their performance is the aggregate results of the component companies revealed in their quarterly and annual earnings reports. The economic fundamentals of each country, as well as their central bank decisions or their government’s fiscal policies, are also important factors. More broadly, political stability, technological progress or the rule of law can also impact equity markets. The performance of US equity indices is also a factor as, more often than not, Asian markets take the lead from Wall Street stocks overnight. Finally, the broader risk sentiment in markets also plays a role as equities are considered a risky investment compared to other investment options such as fixed-income securities.
Investing in equities is risky by itself, but investing in Asian stocks comes along with region-specific risks to be taken into account. Asian countries have a wide range of political systems, from full democracies to dictatorships, so their political stability, transparency, rule of law or corporate governance requirements may diverge considerably. Geopolitical events such as trade disputes or territorial conflicts can lead to volatility in stock markets, as can natural disasters. Moreover, currency fluctuations can also have an impact on the valuation of Asian stock markets. This is particularly true in export-oriented economies, which tend to suffer from a stronger currency and benefit from a weaker one as their products become cheaper abroad.