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Markets weak amid US-China tensions, double-dip recession fears

(ATF) Asian markets fell on Thursday as investors worried about the conflict between the world’s two biggest economies but the downside was limited after China reported street-beating expansion in the second quarter.

US Secretary of State Mike Pompeo said on Wednesday the US State Department will impose visa restrictions  on certain employees of “Chinese technology companies like Huawei that provide material support to regimes engaging in human rights violations and abuses globally.”

Japan’s Nikkei 225 eased 0.49%, Australia’s S&P ASX 200 dipped 0.77% and the Hong Kong benchmark, the Hang Seng index, fell 1.27%. Mainland China’s equity benchmark the CSI300 fell 1.88%.

China’s economy expanded by 3.2% in the second quarter soundly beating street expectations. The expansion followed the historic contraction of 6.8% year-on-year in Q1, the first shrinkage since 1992. 

An AFP poll had expected GDP would expand by 1.3% in the April-June period.

“We expect to see continuous improvement in the upcoming quarters as domestic economic activities largely resume,” said JP Morgan Asset Management Global Market Strategist Marcella Chow.

“Along with the increase in government-driven infrastructure investment, consumption might become a new growth driver. Since domestic households have accumulated a huge amount of bank deposits for precautionary savings during the economic slowdown and pandemic, fast recovery might be seen in consumption when their confidence improves.”

The continued spread of the coronavirus pandemic has also cast a cloud over investor sentiment with the global infection count crossing the 13.5 million mark with over 583,000 deaths worldwide.

This has increased the risk of a W-shaped economic cycle or a double-dip recession, according to analysts at IHS Markit.

“We currently assign a probability of around 20% to such a scenario. Depending on the pattern of infections, this risk could rise in the coming months,” IHS Markit economists Nariman Behravesh and Sara Johnson said in a note. “The likely timing of a second downturn would be late this year or early 2021, and the economic contraction would probably not be anywhere near as severe as the recession we just went through. Virus management has improved, and widespread lockdowns will probably not be necessary.”

The protracted slowdown would mean a low-interest-rate environment for longer which sparks yield seeking flows. Credit markets are firm with the Asia IG index one basis point tighter at 78/79 bps. The primary issuance pipeline remains active with potential deals by Redsun PropertiesGlobe Telecom and DoubleDragon Properties in the market.

Umesh Desai

Umesh Desai is the Executive Editor at Asia Financial. Prior to this he spent over two decades with Reuters News as Asia Pacific Chief Correspondent in Hong Kong and Bureau Chief in Bombay. Before becoming a journalist Umesh was a credit ratings analyst with Moody's arm in India - ICRA. A chartered accountant by training, Umesh began his career as an equity analyst. His Twitter handle is @umesh_desai

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