Global stock rally loses steam as geopolitical tensions rise

A rally in global stocks faded on Wednesday as new coronavirus outbreaks and geopolitical tensions damped investor optimism stemming from signs of a US economic recovery.

In early Asia-Pacific trading, Japan’s Topix index fell 0.5 per cent and South Korea’s Kospi slipped 0.2 per cent. Equity benchmarks in Hong Kong, mainland China and Australia were little changed.

The cautious mood came as investors eyed gloomy geopolitical developments in the region, including an escalation in tensions on the Korean peninsula and the deaths of at least 20 Indian soldiers during clashes with Chinese troops in the Himalayas.

Traders are also monitoring new coronavirus outbreaks in Beijing, with authorities reporting 31 new cases in the Chinese capital as of the end of Tuesday.

“Markets have quickly built [in] expectations of a quick recovery in China in recent weeks and the incoming data has also been supportive,” said Johanna Chua, an emerging Asia economist at Citi. “If the spread of infection in and beyond Beijing continues in days and weeks ahead, then markets may be forced to re-think such expectations.”

Meanwhile, data showed the biggest fall in Japanese exports in more than a decade during May, raising concerns over how quickly the world’s third-biggest economy can recover from the Covid-19 pandemic.

Overnight on Wall Street, the S&P 500 closed 1.9 per cent higher after figures showed a record rebound in US retail sales in May as states began easing coronavirus-induced lockdowns.

US markets were also boosted by reports of a $1tn infrastructure spending package and research that suggested a cheap steroid can reduce deaths from coronavirus.

But Jay Powell, the Federal Reserve chairman, warned Congress of “significant uncertainty” surrounding the “timing and strength” of the US economic recovery, even as he reiterated that the central bank remained “committed to using our full range of tools to support the economy in this challenging time”.

Futures markets tipped the S&P 500 to shed 0.2 per cent when trading begins later on Wednesday. London’s FTSE 100 was expected to rise 0.3 per cent

James Knightley, chief international economist at ING, said that while the jump in US retail sales was encouraging, “we cannot signal the all clear until Covid-19 is beaten, or at least properly contained”.

He added: “The recent spike in new cases in several [US] states suggests we need to make much more progress here, with the threat that renewed lockdowns could have a massive impact.”

A rally in global markets this week has been supported by the Fed’s announcement that it would begin purchasing a “broad and diversified portfolio” of individual corporate bonds, extending existing measures intended to support the economy during coronavirus.

Oil prices slipped on Wednesday after rising a day earlier. Brent crude, the international benchmark, fell 1.7 per cent to $40.26 a barrel. US marker West Texas Intermediate dropped 2.2 per cent to $37.55.