Equities across the Asia-Pacific region dropped after Wall Street stocks suffered their worst day since October, as fears over the impact of new coronavirus strains and high valuations hit investor sentiment.
Japan’s benchmark Topix dropped 1 per cent on Thursday, while in Australia the S&P/ASX 200 lost 1.9 per cent. Hong Kong’s Hang Seng index, which hit multiyear highs earlier this week, weakened 1.8 per cent and the CSI 300 of Shanghai- and Shenzhen-listed shares was down 1.9 per cent.
The wave of investor pessimism in the region came after US stocks were hit by a combination of new fears over the spread of Covid-19 and elevated equity prices.
The S&P 500, which has rallied powerfully since March when the pandemic first pummeled global markets, fell 2.6 per cent on Wednesday after having notched a record high earlier in the week. S&P 500 futures edged down 0.2 per cent during Asian trading, while those for London’s FTSE 100 fell 1 per cent.
“Investors should monitor, but not fear, the risk of a correction,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management.
He added that JPMorgan was “still constructive on the global economic fundamentals” over the next 12-18 months. That should support equities, emerging market debt and corporate credit, Mr Hui said, but he suggested investors “should take a more diversified approach”.
The equity sell-off came despite the Federal Reserve reassuring markets on Wednesday that it would keep its loose monetary policy in place as it held its main lending rate at close to zero.
However, markets were shaken by concerns over new variants of coronavirus as well as the speed at which vaccines could be rolled out.
In China, where the recovery from coronavirus is more advanced than in other big economies, an adviser to the central bank this week warned that asset bubbles would persist unless monetary policy was adjusted.
The People’s Bank of China withdrew Rmb150bn ($23.2bn) of liquidity on Thursday through its open market operations — a process through which the central bank and the banking system lend to one another — in the biggest such move since October.
Ken Cheung, chief Asia foreign exchange strategist at Mizuho Bank, suggested that “fears of deleveraging drove China and Hong Kong equities lower” on Thursday.
Markets also continued to digest the policies of US president Joe Biden, including delays to his proposed stimulus package.
Overnight, the US Treasury delayed the implementation of a ban on Americans investing in about 35 companies with suspected ties to the Chinese military, which Donald Trump imposed after he lost the presidential election last year.
The ban, which would also have forced the liquidation of all US holdings in these companies by November, was supposed to take effect on Thursday. The Biden administration on Wednesday extended the deadline to May 27.