Asian stocks held steady on Monday, consolidating their recent strong gains, though trading was thin due to the Lunar New Year holiday. Light economic data from Japan added some spark to an already robust market.
With many markets, including those in China, South Korea, and Taiwan, closed, currencies and bonds have settled down, but precious metals are facing renewed pressure.
Japan reported a disappointing economic growth figure of just 0.2% for the December quarter, much lower than the anticipated 1.6%. Government spending has been a significant constraint on economic activity.
This lackluster performance underscores the challenges facing Prime Minister Sanae Takaichi and bolsters calls for more aggressive fiscal stimulus.
The Nikkei Shimbun index rose 0.2%, a far cry from last week’s impressive 5% gain. Meanwhile, MSCI’s broader Asia-Pacific index, excluding Japan, edged up by 0.4%.
Although the Korean high-tech market soared by 8.2% last week, Taiwan’s market also enjoyed a solid uptick, increasing about 6% over the same period.
“One concern we have in Asia is that if major tech firms decide to pause their capital spending, that could trigger a significant correction in memory stocks, which have seen remarkable gains this year, particularly in South Korea,” noted Nick Ferres, chief investment officer at Vantage Point.
“It’s likely that we’ll see a rotation favoring emerging markets, but Korean and Taiwanese memory stocks are starting to tread cautiously after their exceptional performance.”
Looking over to Europe, Eurostoxx 50 futures rose by 0.1%, with DAX and FTSE futures gaining 0.2% each. S&P 500 futures also increased by 0.2%, while Nasdaq futures followed suit with a 0.1% rise.
This week’s critical data releases are slated for Friday, which will include a survey on global manufacturing and the U.S. Q4 GDP report.
The median forecast for the quarterly growth is at an annualized 3.0%, down from 4.4% in the previous quarter, yet still showing strength.
Increased capital investment means less stock buybacks
Earnings season is ongoing in the U.S., and there’s anticipation surrounding what major players, like Walmart, will reveal about consumer trends following December’s disappointing retail sales.
The company’s stock has surged by 20% this year, positioning it with a market capitalization exceeding $1 trillion, thus solidifying its status as the largest company in the consumer staples sector.
Given a rotation out of tech stocks prompted by concerns over the hefty costs related to AI investments and the challenges from AI competition affecting sectors like software—witnessing a 24% market cap drop over the last three months—defensive stocks have gained traction.
Capital spending plans for hyperscalers have swelled to $660 billion, which is $120 billion more than at the beginning of the earnings season.
Goldman Sachs analysts reported that stock buybacks within the S&P 500 have dropped by 7% compared to a year ago, primarily due to the soaring capital expenditures.
“This marks the third straight quarter of stagnation,” they noted. “As free cash flow and share buybacks become scarce, we anticipate that the premium for companies focusing on returning cash to shareholders will continue to rise.”
With money flowing out of stocks, there’s a notable influx into the bond market, further affirming the U.S. Federal Reserve’s stance on interest rate cuts.
On Friday, the yield on the two-year note settled at 3.408%, its lowest since mid-2022. Futures indicate a 68% probability of a Fed rate cut in June, corresponding to 62 basis points of annual easing.
The dollar index dipped by 0.8% last week to 96.890 as yields decreased, particularly against the rebounding Japanese yen. The dollar fell 2.9% last week but edged up by 0.2% to 153.05 yen on Monday. The euro remained stable at $1.1866.
The dollar also decreased 1% against the Swiss franc last week, while the euro fell below 0.9100 francs for the first time since 2015.
With inflation sitting at 0.1%, close to the lower end of its target range of 0% to 2%, the franc’s persistent rise has led markets to speculate on potential intervention by the Swiss National Bank.
In commodity markets, gold dropped by 1.3% to $4,973 an ounce following a robust rally in recent weeks as some investors closed leveraged positions. Silver slipped by 3% to $75.05 an ounce.
Oil prices remained stable as investors reacted to a Reuters report suggesting OPEC’s inclination to resume production in April. Brent crude held steady at $67.77 per barrel, while U.S. crude saw little change at $62.91 per barrel.
