Asia bourses traded mixed as the region struggled to maintain the momentum from the US. Cyclicals stocks were favoured with materials, energy, financials and industrials, the outperformers in the S&P 500. However, gains were capped amid China-related tensions after Australia cancelled the Victoria State MOU and framework agreement with China regarding the Silk Road economic belt signed in 2018. China strongly opposed the cancellation and warned that the action is bound to deteriorate bilateral relations further. Worth keeping an eye on any escalation over this theme that could trigger some risk-off outflow of China and Australia risk assets. Nikkei 225 traded high +2.4% outperformed and recovered the 29k level with the index largely unfazed by a mixed FX and potential state of emergency declarations for four prefectures which the government will reportedly decide on this Friday. Hang Seng and Shanghai Composite both initially began higher, but briefly, they pared all their gains amid ongoing concerns of tighter regulation. They continued overhang from US-China tension after the US Senate Foreign Relations Committee backed the Strategic Competition Act of 2021 to send the bill to a full vote at the Senate. A bipartisan group of lawmakers also proposed legislation calling for USD 100bln in science funding to keep the US competitive with China and other nations.
In Wall Street, stocks were lower after a heavy risk-off move in the US afternoon on the back of capital gains tax hike proposals from the White House. The news saw a general risk-off move as the “fear index”, the VIX, just failed to break above 20, with US Treasuries paring losses and USD trader firmer, with strengths for other safe-havens assets too, such as JPY. While the announcement was unexpected in yesterday’s session, similar proposals had been touted before on the campaign trail, so it is not a complete shock. While the corporate 40% tax rate being touted is chunky, it will most likely not get far in Congress. The overall market now sits on the defensive side into Friday’s PMI print. In contrast, any outsized moves tomorrow will likely be attributed to position closing ahead of the weekend with FOMC on the radar next week, with traders trying to figure out how dovish the Fed policymakers will signal for the quarter ahead.
