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Japanese stocks sparkle as US debt talks continue

MSCI’s broadest index of Asia-Pacific shares have drifted 0.3 per cent higher in trade thinned by a holiday in Hong Kong.

May 26, 2023
By Tom Westbrook
26 May 2023

Stocks were subdued on Friday, apart from standout gains in Japan, as an artificial intelligence rally took a breather and as time ticked out on high-stakes talks to avoid a US debt default.

MSCI’s broadest index of Asia-Pacific shares outside Japan drifted 0.3 per cent higher in trade thinned by a holiday in Hong Kong. The index is down 1.6 per cent on the week.

Japan’s Nikkei, by contrast, rose 0.7 per cent and is riding momentum from foreign inflows and basking in the afterglow of revenue and production upgrades for US chipmaker Nvidia that have set Japanese firms with exposure soaring.

The Nikkei is up 0.7 per cent on the week, too, for a seventh weekly gain in row – its longest weekly winning streak in five years and one which has added some $US460 billion ($A707 billion) to Japanese stocks.

May data on Friday showed inflation slowing to 3.3 per cent in Tokyo, a decent proxy for the nation, which means it’s been comfortably above the Bank of Japan’s two per cent target for a year now. The world’s third largest economy has struggled for decades to get meaningful and sustained rises in prices, profits and wages.

“The pandemic has brought with it an unprecedented string of inflation drivers for Japan,” said analysts at Nomura, who noted households are spending and have upgraded stock forecast ranges.

“These forces have brought about a tectonic shift in the price-setting behaviour of Japanese companies, and thus an improvement in their profit margins.”

A weak yen has also been helping flatter Japanese exporters’ accounts and though it crept to the stronger side of 140 per US dollar on Friday it is down 1.4 per cent this week as worry about a possible US debt default has the dollar surging.

The dollar is up about 0.7 per cent on the euro for the week and last traded at $US1.0730 on the common currency. The US dollar index touched a three-month high of 104.31 overnight and was last at 104.16, up 0.9 per cent on the week.

US President Joe Biden and top congressional Republican Kevin McCarthy are closing in on a deal to raise the United States government’s $US31.4 trillion debt ceiling for two years, a US official told Reuters, but time is running short.

The US Treasury estimates it’ll run out of funds within a week and legislating any deal will take that down to the wire.

Prices for Treasury bills maturing on the so-called X-date of June 1 recovered overnight with hopes for a breakthrough, while the rest of the curve was under pressure as investors have also been worrying US rates will go higher.

Two-year yields hit a two-and-a-half month high of 4.552 per cent in Asia on Friday, up 24 basis points on the week.

The New Zealand dollar has been a big loser on the week, diving thre per cent to test 60 cents as nerves about higher US rates have come together with New Zealand’s central bank all but calling time on rate hikes at its meeting on Wednesday.

The kiwi was last at $US0.6077.

China’s yuan has been the other notable casualty and has slid along with Chinese stocks as the shine comes off expectations of a booming post-pandemic recovery.

The yuan is down three week in a row and has lost about 0.8 per cent this week to touch troughs not seen since China remained in the grip of COVID lockdowns late last year. It was last at 7.0679 to the dollar.

“The US debt issues are not the only ‘ceiling’ that we are dealing with, as a slowdown in Chinese economic data suggests that a ceiling for growth may be forming as well,” said RBC technical strategist George Davis.

“This is exhibited by a not only a decline in Chinese stocks and (the yuan), but also through a sell-off in copper and iron ore.”

Shanghai copper hit a six-month low on Thursday and is down about 2.5 per cent on the week. Singapore iron ore is down about three per cent on the week. Brent crude futures have been steady around $US76 a barrel. Spot gold is at $US1,947 an ounce.

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