Hong Kong stocks led a broad rally across Asian markets on Wednesday, surging over 3% to hit a one-week high. The surge was fueled by an upbeat reaction to positive economic data from China combined with hopes that moderating US inflation could lead the Federal Reserve to ease up on interest rate hikes.
The Hang Seng Index jumped 562.65 points or 3.23% to close at 17,959.51, marking its highest level in over a week. Gains were broad-based across the index, with all 50 constituents closing higher. The Hang Seng Tech Index, which tracks major tech firms listed in Hong Kong, jumped even more – soaring over 3.5% on the day. Stocks in mainland China also climbed, with the CSI 300 Index rising 0.56%.
Two key factors drove the bullish sentiment across Asian markets:
1. Stronger-than-expected economic data from China
Beijing reported better-than-forecast figures for retail sales and industrial output in October, signaling the world’s second-largest economy may be stabilizing after a turbulent year.
Retail sales, a crucial sign of consumer strength, rose 7.6% last month versus the same period last year. That beat analysts’ expectations for 7% growth. The pickup in spending was likely helped by China’s Golden Week holiday at the start of October.
Industrial output also beat forecasts, climbing 4.6% year-on-year against expectations for 4.4% growth. This suggests China’s vast manufacturing and industrial base continues regaining momentum after COVID lockdowns disrupted activity earlier this year.
The upbeat data eased worries about China’s economy slowing under pressure from weak global demand, still-strict zero-COVID policies, and ongoing turmoil in the property development sector. Chinese stocks often benefit when worries over the domestic economy fade.
2. Hope of a Fed pivot on rate hikes after soft US CPI
Sentiment also received a boost after US inflation data released Tuesday came in cooler than expected for October. The US Consumer Price Index was flat versus forecasts for a 0.1% monthly rise.
The slower increase boosted hopes that the Federal Reserve’s aggressive interest rate hikes this year may be starting to bring down inflationary pressures. Investors are now betting the Fed will slow its pace of hikes going forward.
Asian markets, very sensitive to Fed policy and the outlook for US growth, rallied on prospects that an easing up by the Fed could help extend the US expansion. Less aggressive Fed tightening helps markets in Asia by keeping borrowing costs lower and the US dollar weaker.
Japan’s Nikkei 225 jumped 2.59%, hitting its highest level in nearly two months. South Korea’s Kospi gained 1.93%, while Australia’s S&P/ASX 200 closed 1.42% higher at a two-month peak.
Tech shares stand out with sizable gains
Tech stocks were standout performers across the region following the softer US inflation data. Hong Kong’s Hang Seng Tech Index soared over 3.5%, with Meituan surging nearly 8.5% and Alibaba jumping over 6%. Chipmakers like Taiwan Semiconductor Manufacturing Co. and Samsung Electronics climbed over 2% each.
The sector is sensitive to interest rates, as higher rates hurt valuations for tech firms that rely on future earnings growth. Easing inflation reduces the risk of even more aggressive Fed hikes down the line.
Chinese electric vehicle makers also rallied on hopes that reopening in China could revive auto demand. BYD jumped over 5%, while Xpeng and Li Auto each gained over 3.5%.
Geopolitical tensions ease somewhat
Stock markets also received a slight boost as some key geopolitical tensions showed signs of easing.
US President Joe Biden and Chinese President Xi Jinping are expected to hold their first in-person meeting since Biden took office on the sidelines of the G20 summit in Bali. The leaders are likely to discuss contentious issues like Taiwan, trade, and technology restrictions. But investors hope the meeting could start stabilizing an increasingly strained US-China relationship.
In Japan, recent yen weakness versus the US dollar has raised speculation that Tokyo could intervene to prop up its currency. But the yen strengthened on Wednesday, reducing the pressure for any near-term intervention.
Challenges remain for Asian economies
Despite the rally, Asian markets still face an uphill battle sustaining gains. China continues grappling with weak global demand, fresh COVID outbreaks, and fallout from its property sector. Japan’s economy shrank last quarter amid slowing overseas growth and rising inflation.
Central banks across Asia are also hiking rates to combat inflationary pressures, with South Korea, India, and others expected to continue tightening policy. This risks hurting growth across the region.
Still, investors welcomed the easing of two key pressure points this week – China’s economy and Fed policy. Further positive developments on either front could help Asian stocks continue rebounding from their lows this year. But any renewed deterioration would likely halt the nascent rally in its tracks.