Markets cheer, Fitch downgrades Hong Kong

Summary:

• Asian equities perform quite well following a surge on Wall Street yesterday
• Fitch downgrades Hong Kong for the first time since 1995
• Some macroeconomic readings from Asian economies

Optimism spreads over

Asian equity markets are rising across the board following solid gains made by the US indices on Thursday where NASDAQ rose 1.75%, Dow Jones added 1.4% and SP500 jumped 1.3%. Looking at Asian indices one may notice that Japanese NIKKEI along with Australian S&P/ASX200 are the best performing ones climbing as much as 0.5% at the time of writing. Splendid sentiment on Wall Street came following a firm reading on US employment as well as much better than expected non-manufacturing ISM (although the employment component saw a noticeable decline). While solid ISM could be a reassuring signal for investors, as it suggests that the services sector continues to be robust, the details do not look so well. We reckon that the solid pick-up in production and domestic orders was sparked mainly by piling up inventories as well as reducing backlog of orders (this component sank below 50 points for the first time since December 2016) suggesting that activity remains rather muted. At the same time, new export orders saw a massive decline to 50.5 from 53.5 signalling rather tepid foreign demand. In our view, today’s employment report from the United States will be important, as it usually is, however it should not derail a rate cut further this month regardless of the result.

Japanese NIKKEI continues picking up after touching the support nearby 20200 points. Source: xStation5

First downgrading since 1995

Perpetual protests in Hong Kong convinced Fitch to downgrade the country to AA from AA+ with a negative outlook, this was the first rating cut since 1995. The statement says that months of persistent conflict and violence are raising doubts about the country’s governance. The rating agency wrote in its statement that erosion of the autonomy of the government, continued social instability and evidence that Hong Kong’s economy is susceptible to heightened spillovers from mainland China are the prime factors that could lead to negative action. Concurrently, a resolution of the ongoing protests and an improvement in mainland China’s sovereign credit profile could lead to positive action. Let us recall that S&P Global Ratings said last week that despite the turmoil in Hong Kong it did not intend to change its AA+ credit rating for the Asian country with a stable outlook. Do notice that the Hong Kong’s economy saw the slowest economic growth during the first half of the year since the great financial crisis.

In the other news:

• Australian construction AIG for July rose to 44.6 from 39.1

• Japanese household spending rose 0.8% YoY in July; labour cash earnings fell 0.3% YoY in July (down 0.9% in real terms)

• German industrial output fell 0.6% MoM in July, the consensus had called for a 0.4% pick-up