Volatility in China unsettled Asian markets Tuesday, with stocks in Shanghai deepening losses ahead of key decisions on monetary policy by central banks in Japan and the U.S.
The Shanghai Composite Index fell 3% early in the trading day, adding to its 2.7% loss Monday. That pushed down shares elsewhere in the region, including Australia’s S&P/ASX 200 , which fell more than 1.4%, and the Hang Seng Index down 0.3%.
The Nikkei Stock Average gained 0.5% as investors covered short bets ahead of comments from the Bank of Japan expected later today.
While China’s government has intervened to prop up its domestic market, a recent batch of disappointing Chinese data has spurred further selling. Volatility was returning after the Shanghai benchmark had eked out gains last week for the first time since mid-August.
Two economic reports on Sunday — factory output and fixed-asset investment — fell short of expectations, adding to concerns that China could struggle to reach its full-year growth target of 7%.
“I think the markets are still very much on edge ahead of the Fed meeting,” said Sean Callow, a currency strategist at Westpac Banking Corp. “There is some nervousness exported from China, when their markets came under pressure yesterday.”
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The weakening of the region’s markets also comes after U.S. stocks slipped Monday, with many investors staying on the sidelines ahead of a U.S. Federal Reserve meeting that could end with the first rate-increase in nearly a decade. The two-day meeting begins on Wednesday U.S. time.
But the Nikkei Stock Average rose on Tuesday, as Japan’s central bank wraps up its own meeting later today. Analysts say investors have been extra cautious given that the bank could shed light on potential easing later in the year.
Some market participants may be covering short positions before the Bank of Japan’s outcome, said Yoshihiro Okumura, general manager of research at Chibagin Asset Management.
While the Nikkei is down 14% from its late — June peak as of Monday’s close, analysts expect the Bank of Japan to remain on hold for now. Some expect additional easing in October, given that the pace of Japan’s economic recovery has been slow.
“If the [bank] went now, this month, they’d be criticized by a lot of people. There’d be a lot of blowback from the rank and file members of parliament,” said CLSA’s managing director of equity strategy, Christopher Wood. Japan is currently committed to raising the monetary base by 80 trillion yuan on an annual basis until it reaches its 2% inflation target.
Australia’s stock market is down roughly 15% from its late April peak. A party coup late Monday installed former investment banker Malcolm Turnbull as the country’s fourth prime minister in just over two years, exposing deep unease about the country’s sharply slowing economy. Recent data showed the economy grew at its slowest pace in four years in the second quarter, amid fresh warnings that Australia might soon slide into recession, its first in close to 25 years.
Earlier Tuesday, the Reserve Bank of Australia released minutes from its recent meeting that showed a neutral tone on its outlook for interest rates. Interest rates were lowered to a record low of 2.0% in May as the RBA reacted to slowing economic growth and falling commodity prices.
The Malaysian ringgit and Korean won slipped slightly but the Australian dollar was up 0.3% against the U.S. dollar, its strongest since the beginning of the month.