Asian Markets to Jump in ‘Sympathy Rally’ as Inflation Eases

(Bloomberg) -- Investors are priming for a bounce across Asian equity markets Friday after slower-than-expected US inflation data indicated smaller Federal Reserve rate hikes and triggered the biggest jump for US shares in two years.

Analysts expect technology and other rate-sensitive stocks to jump, but caution that rising Covid-19 cases in China and the turmoil in cryptocurrencies may cap gains. A weaker dollar also offers a tailwind for emerging market equities.

‘Sympathy Rally’

“We’ll see a snap reaction in Asian equities and Australian equities will have a quick jump,” said Ned Bell, chief investment officer of Bell Asset Management. “You’ll get a sympathy rally but I’m not sure how much legs will be behind it. You’ll probably see a short-term kick in Chinese tech names,” he said. “In the background what is happening in crypto is weighing on risk appetite, so it’s hard to gauge.”

Asian Shares

“The downside surprise on US inflation and the surge in US shares points to a strong rebound in Asian share markets today,” said Shane Oliver, a head of investment strategy at AMP said. “The combination of a less hawkish Fed, less risk of a deep US recession and a peaking $US are all positive for Asian shares.”

Tech to Jump

“US sector performance should serve as a guide for Asian equities,” said Chamath De Silva, senior portfolio manager for Sydney-based BetaShares Holdings. “We saw outperformance from the most beaten up sectors of late, namely tech, consumer discretionary and rate sensitive exposures like REITs.” 

Hang Seng Bounce

“We’re cautiously bullish on the Hang Seng and see its potential to lift further from its 13-year low,” said Matthew Simpson, senior market analyst at at StoneX Financial. “The bearish move looks over-extended,” and “the HSI looks to benefit over the near-term from a higher HKD/CNY exchange rate,” he said. “We’re questioning how much doom and gloom is already priced in.”

Return to China

“The dollar’s rise over the past year has left Asian markets increasingly exposed to capital outflow, so with one fell inflation swoop, that external vulnerability has been eased and should open the door to inbound investment,” said Stephen Innes, a managing partner at SPI Asset Management said. “Given the move in global rates, the post-CPI first leg is likely to play out through tech, with the HSI Tech Index a significant beneficiary.”

New EM Cycle

“The number one takeaway from the CPI is that the dollar is moving lower,” said Thomas Hayes, chairman at Great Hill Capital. “Weak dollar is historically very good for emerging market equities. This could be the start of a new cycle for emerging market equities.”

Yen Effects

“In Japan’s market the resultant big drop in value of the dollar against the yen will prove problematic given how much the weaker yen has proved supportive of earnings,” said Amir Anvarzadeh, strategist at Asymmetric Advisors.

“Names like Sony, Epson and Nintendo are just a few in our short picks that could see that currency support pulled,” he said. “Even our long Subaru would be exposed to reversal of the currency although volume growth in production is why we think it looks strong for next term.”

Aussie, Kiwi Dollar Rallies

“We expect AUD and NZD to make further modest gains today, particularly if US equity futures increase further.” said Joseph Capurso, head of international economics at Commonwealth Bank of Australia in a note. But while inflation in the US is improving, the news from China is not amid weak lending data and rising Covid infections, he said. “The upshot for AUD and NZD is this morning’s surge are likely to fade over the following week.”

Spread Pressure

“While the lower-than-expected CPI print is clearly a step in the right direction, US rates are still going higher,” said Mark Reade, head of fixed-income desk research at Mizuho Securities Asia. “Such policy tightening, at a time of slowing global growth suggests that the path of least resistance for credit spreads including those of Asian dollar bonds remains wider.”

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