Asian shares dragged by vaccination lag, Wall Street fares better

Reuters Sydney | Updated on July 23, 2021

Euro weighed as ECB to keep rates low for longer

Asian share markets were in a mixed mood on Friday after a volatile week in which sentiment over global growth waxed and waned with every new headline on the Delta variant.

A slew of surveys on July manufacturing are expected to show a slight softening of activity in Europe and the United States,though from very high levels, while Asia looks more vulnerable.

"In the face of headwinds from the Delta variant of the COVID-19 virus, the global economic expansion is moving forward—albeit more tentatively than a month ago," said Sara Johnson, executive director of global economics at IHS Markit.

"Outlooks in advanced countries with high vaccination rates remain bright, but near-term prospects in emerging and developing countries with low vaccination rates are murkier."

That diverging outlook was reflected in MSCI's broadest index of Asia-Pacific shares outside Japan which slipped 0.4 per cent, leaving it down 1.1 per cent on the week so far.

Japan's Nikkei was closed for a holiday, but off1.7 per cent for the week and a whisker away from a seven-month trough.

Chinese blue chips lost 1 per cent, though well within the tight trading range of the past three weeks.

Wall Street was in a better mood after a run of strong earnings, with Nasdaq futures up 0.3 per cent and S&P 500 futures0.2 per cent. EUROSTOXX 50 futures also firmed 0.3 per cent,while FTSE futures gained 0.4 per cent.

Investors are now looking ahead to the Federal Reserve's policy meeting next week where more discussion about tapering is expected, though Chair Jerome Powell has repeatedly said the labour market remains well short of target.

He also still argues that the recent spike in inflation will prove fleeting, which may be one reason bond markets have been rallying so hard. Yields on US 10-year notes were last at 1.28 per cent, having hit a five-month low of 1.128 per cent early in the week.

German 10-year bonds performed even better, with yields dropping seven basis points so far this week to -0.42 per cent,the lowest since mid-February.

The rally was helped by a dovish tilt from the European Central Bank overnight when it pledged not to raise rates until inflation was sustainably at its 2 per cent target.

"Currently the ECB is forecasting inflation at 1.4 per cent in 2023,and it anticipates a very gradual recovery towards target thereafter," noted analysts at ANZ.

"The guidance implies the ECB will not get caught up in future global tightening cycles unless it is justified by euro area dynamics. The policy puts the ECB at the dovish end of the global central bank hawkometer."

Currency and commodity

That outlook has contributed to a steady decline in the euro to $1.1773, near the four-month trough of $1.1750 touched earlier in the week. This helped lift the dollar index to its highest since early March, and it was last at 92.818.

The euro has also been struggling against the safe-haven Japanese yen and hit its lowest in four months this week before steadying at 129.68 yen. With all the action in the euro, the dollar has been relatively steadier on the yen at110.24.

In commodity markets, gold dipped to $1,802 an ounce and was 0.4 per cent easier on the week. Base metals have fared much better as strong demand meets restricted supply.

Oil prices have also been buoyed by speculation demand will outpace supply in coming months even after OPEC+ agreed to expand production.

Brent was last off 27 cents at $73.52 a barrel,after jumping overnight, while US crude lost 25 cents to $71.66 per barrel.

Published on July 23, 2021

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