Asian shares were mixed Tuesday with some markets closed or anticipating holidays and investors showing muted reaction to the latest U.S. banking failure.
Australia’s S&P/ASX 200 dipped 1.1% to 7,254.40, after the Reserve Bank of Australia raised interest rates by a quarter-percentage point, an unexpected move that signaled further tightening might be ahead. South Korea’s Kospi gained 0.6% to 2,515.24. Hong Kong’s Hang Seng gained 0.5% to 19,986.86.
Japan's Nikkei 225 edged up 0.1% in afternoon trading to 29,162.85. Trading in Tokyo will be closed for Golden Week holidays the rest of the week. Trading was closed in Shanghai for Labor Day.
Economic and inflation reports are expected in Europe ahead of the central bank meeting later in the week. Markets are also bracing for what is hoped to be the last interest rate hike by the U.S. Federal Reserve for some time. Oil prices and currencies were little changed.
Recent China's manufacturing data showed a contraction, reflecting how the weakening export market is starting to hurt the domestic economy, according to analysts.
“We believe that the government will resume subsidies on electric vehicles, which would benefit both the manufacturing and services sector. The government might also push infrastructure construction faster,” said Robert Carnell and other analysts at ING in their report.
On Wall Street, the S&P 500 was virtually unchanged after regulators seized First Republic Bank and sold off most of it in hopes of preventing more turmoil in the industry. It dipped 1.61, or less than 0.1%, to 4,167.87. The Dow Jones Industrial Average slipped 46.46, or 0.1%, to 34,051.70, and the Nasdaq composite fell 13.99, or 0.1%, to 12,212.60.
First Republic has been feared as the next to topple following March’s failures of Silicon Valley Bank and Signature Bank. That fueled a larger worry that runs on smaller and midsized banks could take down the economy, like the financial industry's woes did in 2008.
But analysts and economists see big differences between then and now. The biggest U.S. banks are feeling less pressure, and several banks under scrutiny have said their deposit levels have strengthened since late March. And the stock market's reaction indicates investors see First Republic Bank, which plunged 75% last week, as an isolated rather than systemic problem.
Shares of JPMorgan Chase, which is buying much of First Republic’s assets, rose 2.1%. It’s becoming even bigger following the deal.
Still, many other questions continue to hang over Wall Street that could shake things up. They include worries about corporate profits and the U.S. government’s latest squabble over the country’s debt limit.
Above all is what the Federal Reserve will do with interest rates. At its next meeting, which concludes Wednesday, most traders expect the Fed to raise short-term rate by another quarter of a percentage point, up to a range of 5 to 5.25% from virtually zero early last year.
The hope is that may be the final increase for a while, which would give the economy and financial markets more breathing room.
The Fed has been raising rates sharply in hopes of getting high inflation under control. But high rates are a notoriously blunt tool that slow the entire economy, raise the risk of a recession and hurt prices for investments.
If banks limit their lending following their industry's recent struggles, even if there are no more failures, that could act like rate increases on their own. Many investors are preparing for a recession to hit later this year.
A report on Monday from the Institute for Supply Management said manufacturing activity shrank again in April, though not as badly as most economists expected. Other reports this week will give the latest updates on U.S. services industries and hiring across the economy.
One lever that’s propped up Wall Street in recent weeks has been a stream of companies reporting better profits for the first three months of the year than expected.
Through last week, with just over half of S&P 500 companies reporting, nearly four in five had reported higher earnings than forecast, according to FactSet. That has companies in the index on track to report a drop of 3.7% from a year earlier.
That would mark a second straight quarter of falling earnings, something that Wall Street calls a profit recession. But it would not be as bad as the 6.7% drop that analysts forecasted a month ago.
In the bond market, Treasury yields rose as expectations firmed on Wall Street for at least one more rate hike. The yield on the 10-year Treasury rose to 3.58% from 3.43% late Friday. It helps set rates for mortgages and other important loans.
The yield on the two-year Treasury, which moves more on expectations for Fed action, rose to 4.13% from 4.02%.
In energy trading, benchmark U.S. crude inched down 1 cent to $75.65 a barrel. Brent crude, the international standard, fell 3 cents to $79.28 a barrel.
In currency trading, the U.S. dollar inched up to 137.70 Japanese yen from 137.47 yen. The euro stood at $1.0991, up slightly from $1.0978.
