Image Source : AI Imagine

Asian markets started the week mostly in negative territory amid renewed concerns that the U.S. Federal Reserve will continue raising interest rates aggressively to combat high inflation. Investors are awaiting the release of critical economic data from China and India this week.

The Kospi index in South Korea fell 0.27% while the Kosdaq slipped 0.28% in early morning trade on Monday. Japan’s Nikkei 225 was nearly flat, but the Topix climbed 0.28%.

In Australia, the benchmark S&P/ASX 200 dropped 0.2% at the open. Futures pointed to a weaker start for Hong Kong’s Hang Seng index compared to its closing level of 18,202.07 on Thursday. Hong Kong had cancelled trading on Friday due to the heaviest rainfall recorded in the city in 140 years.

Overall, markets across Asia Pacific reflected the cautious mood seen on Wall Street at the end of last week. On Friday, the S&P 500 managed a modest 0.14% gain after falling for three straight days. The Dow Jones Industrial Average rose 0.22%, while the tech-heavy Nasdaq Composite edged up 0.09%.

For the week, major U.S. stock indexes still booked losses, as investors weighed the possibility of more aggressive tightening by the Fed after hawkish comments by central bank officials.

China Slowdown in Focus with Industrial Data on Tap

In Asia, attention will be on China’s slate of economic releases this week, especially the August data for industrial production, retail sales, and home prices due on Friday.

The world’s second-largest economy has shown signs of slowing down in recent months amid prolonged COVID lockdowns and a deepening real estate crisis. Official and private manufacturing surveys for August indicated contraction in factory activity.

While China’s exports remained a bright spot in July, car shipments made up a large share of the growth. Domestic demand looks uncertain, with retail sales staying flat in July. Investors will be watching closely to see if consumption held up last month.

“Despite an overall [earnings] slump in the second quarter, overseas sales helped boost some sectors,” said Lei Meng, China equity strategist at UBS Securities, in a recent note. She pointed to electric vehicle makers like BYD that managed to grow profits thanks to strong international demand.

India Inflation, Industrial Data Could Sway RBI’s Rate Stance

India will also release key figures this Tuesday, including August’s retail inflation print and index of industrial production.

Consumer inflation likely accelerated to 6.9% year-on-year in August, driven by higher food prices, according to a Reuters poll. This would move further above the central bank’s 2–6% target range.

Industrial output growth is forecast to cool to 2.7% in July on an annual basis. High inflation and slower manufacturing activity do not bode well for the recovery in Asia’s third-largest economy.

The incoming data could influence the Reserve Bank of India’s decision on interest rates at its policy meeting at the end of this month. The RBI has raised the benchmark repo rate by 140 basis points since May to fight surging prices.

Return of Bullish Sentiment Adds Pressure on U.S. Stocks

In the U.S., stocks face renewed pressure after sentiment among retail investors turned more bullish last week.

The percentage of individual investors feeling positive about the 6-month outlook for stocks jumped to 42% in the latest American Association of Individual Investors (AAII) survey, up from 33.1% the previous week. This was the first time the reading climbed above its historical average of 37.5% since early August.

Meanwhile, the number of investors feeling bearish sank to 29.6%, the lowest level in four weeks.

Similarly, a higher proportion of market newsletter writers surveyed by Investors Intelligence turned bullish last week. Rising optimism suggests significant cash may have already entered the stock market, leaving less fuel for further gains.

Contrarian investors view excessive bullishness as a warning sign. It indicates investors have become too complacent and invested in risk assets near their peak.

Apple Stock Pressured Before Expected iPhone 15 Launch

Apple shares managed to eke out a 1.2% gain on Friday after falling sharply earlier in the week. But analysts cautioned that the stock could remain under pressure going into the tech giant’s expected launch of the iPhone 15 line next week.

“We believe share price outperformance in the remainder of the year (particularly after a strong outperformance in 1H and underperformance between July and September) is dependent on beating what are now low investor expectations for the iPhone 15 launch,” JPMorgan analyst Samik Chatterjee wrote on Friday.

While cutting his price target on Apple to $200 from $200, Chatterjee maintained an overweight rating on the stock. Shares traded below $160 on Friday, leaving substantial potential upside if the company exceeds forecasts.

Investors have become increasingly doubtful about consumer demand for new smartphones amid high inflation and a potential economic slowdown. Apple saw blockbuster sales when it unveiled the iPhone 13 series last year in a booming economy. The company may struggle to generate as much excitement this time around.

Oil’s Rise Lifts Energy Stocks

Gains in crude oil prices boosted energy stocks on Friday, with the sector continuing its recent market-leading performance.

The Energy Select Sector SPDR Fund (XLE) climbed 1.3%, bringing its weekly gain to nearly 2%. Shares of oil giants Exxon Mobil and ConocoPhillips rose more than 1% apiece.

Global crude benchmarks Brent and West Texas Intermediate (WTI) both traded around $90 per barrel after WTI moved back above that psychologically important level. Steady demand and tight supplies have supported oil throughout 2022, even amid economic uncertainty.

Rising petroleum exports have aided U.S. energy companies in posting standout profits this year. Investors appear confident that the industry’s earnings can remain resilient even if overall growth slows.

Bond Yields Retreat Heading Into Next Week

Long-term Treasury yields ticked lower Friday morning as bond investors considered the U.S. rate outlook.

The benchmark 10-year Treasury yield declined by more than two basis points to around 4.23%, while the 2-year yield also fell over one basis point, hovering below 5%. Yields fall when bond prices rise.

Demand for safer assets like Treasurys picked up, reflecting lingering concerns about economic risks and corporate profits if the Fed goes too far with tightening. Markets are betting that rates could peak above 5% next year before cuts materialize.

Next week’s U.S. inflation report will provide a crucial update on whether pricing pressures are starting to ease. The August consumer price index is forecast to show an 8.1% annual increase, down from 8.5% in July.

The inflation data could give further clues on the Fed’s policy path. More signs that inflation remains sticky at uncomfortable levels could add pressure on stocks.

Key Takeaways: Caution Persists Ahead of Major Data

• Asian stocks followed Wall Street lower as markets await pivotal economic releases from China and India this week.
• China’s industrial activity, retail sales and housing data will offer clues on the extent of its economic struggles.
• India’s worsening inflation may force its central bank to maintain its aggressive rate hike campaign.
• Renewed bullishness among U.S. investors adds headwinds for stocks after a summer rebound.
• Apple faces doubts around demand for its impending iPhone 15 launch next week.
• Rising crude prices continue to support energy stocks and oil producers’ earnings.
• Treasury yields drifted lower as inflation and growth fears linger ahead of next week’s U.S. CPI report.

With uncertainty still elevated, investors seem reluctant to make big bets before seeing key updates on the health of major Asian economies and the Federal Reserve’s policy trajectory. China’s data dump on Friday may set the tone for markets next week.