Asian Stocks decline as surging oil prices stoke inflation fears and lift Fed hike bets

Asian stocks track the overnight fall on Wall Street amid concerns about oil-driven inflation.
The US PPI lifted September Fed rate hike and dents investors’ appetite for riskier assets.
US-Iran tensions keep the geopolitical risk premium in play and further weigh on sentiment.

Haresh Menghani FXStreet

Asian stocks declined sharply on Friday, tracking the overnight fall on Wall Street, as a surge in energy prices and a global bond selloff trigger the broader risk-off move.

Crude oil prices shot to the highest level on May 21 as increasing attacks along key shipping routes in the Middle East fuel fears of a prolonged disruption to supplies. In fact, Iran-backed Houthis in Yemen seized the crucial Red Sea city of Mocha, expanding its control over the strategic Bab al-Mandeb Strait. This comes as shipping traffic through the Strait of Hormuz remains restricted due to the US-Iran standoff and continues to act as a tailwind for oil prices.

In further developments, the US Treasury plans to sanction a large, undisclosed bank on Monday as part of its ongoing economic pressure campaign against Iran. Meanwhile, US President Donald Trump said that the Iran war will likely continue until after the November midterm elections, keeping geopolitical risk premium in play and supporting oil prices. This might continue to fuel energy-driven inflation worries and weigh on investors' sentiment.

Meanwhile, the US Bureau of Labor Statistics (BLS) reported on Thursday that the headline Producer Price Index (PPI) rose to a 5.4% YoY rate in August, compared to the previous month's upwardly revised print of 4.8%. Stripping out food and energy, the core gauge matched forecasts and rose 4.6% YoY from 4.3% in July. This prompted traders to add to bets on a Federal Reserve (Fed) rate hike next week and further dented investors' appetite for riskier assets.

Asian stocks FAQs

Which are the main stock market indices in Asia?

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.

What are the main sectors represented in Asian stock markets?

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.

What factors drive Asian stock markets?

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.

What are the risks of investing in Asia stock markets?

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.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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