San Francisco Frontiers - Markets drop as China growth worries offset Fed rate hopes

Regional traders extended Monday's retreat sparked by disappointing second-quarter data out of Beijing that missed forecasts badly and highlighted the tough job officials face in getting the country's post-Covid recovery back on track.

And while there is an expectation that fresh stimulus measures are in the pipeline, analysts warned that leaders were limited in how far they could go.

The figures came after last week's reports showing inflation had flatlined, suggesting China was on the brink of a period of painful deflation, while exports plunged for a second straight month.

"You're gonna see some stimulus coming in, which means that the second quarter may have been more of the low, the third quarter a bit better," Joyce Chang, global head of research at JPMorgan, said on Bloomberg Television.

"But we've taken half a percent off of China's growth and I think that the deflation risks are there."

Hong Kong led losses Tuesday, shedding around two percent following a five-day rally, as it reopened a day after being shut because of a severe storm.

Shanghai, Sydney, Seoul, Singapore, Manila, Jakarta, Wellington and Taipei also dropped, though Tokyo, Mumbai and Bangkok edged higher.

Paris and Frankfurt dipped at the open while London was flat.

The losses came despite a positive lead from Wall Street.

In a report on China, Alicia Garcia Herrero and Jianwei Xu at Natixis CIB said in a report: "We are conservative about the extent of the policy support down the road. Fiscal policies may not be easily implemented in the current situation, given the already high public debt and the reduced efficiency of these policies."

They said there was a possibility that the central bank would cut interest rates again and lower the amount of cash lenders must keep in reserve, allowing them to provide more loans.

But, they added: "The effectiveness of the monetary policy space may be limited due to the lack of investor confidence. Currently, the market is awaiting further regulatory relaxation on key sectors, such as the real estate sector, which could help bolster investors' confidence."

Meanwhile, US Treasury Secretary Janet Yellen warned about the effects of China's weakness on the global economy.

"Many countries do depend on strong Chinese growth to promote growth in their own economies, particularly countries in Asia, and slow growth in China can have some negative spillovers for the United States," she said in a Bloomberg Television interview.

However, she did say she was optimistic about the outlook for the US economy, which she described as being on a "good path".

"Growth has slowed, but our labour market continues to be quite strong. I don't expect a recession," she added.

Her comments come after last week's news that US inflation had come down quicker than expected in June, stoking hopes the Fed was close to the end of its interest rate hiking cycle.

While officials are tipped to announce another rise next week, debate now focuses on whether that will be the last.

Investors are also keeping watch on the corporate earnings season, which has just got under way, with Bank of America, Tesla, Netflix and EasyJet among those reporting this week.

- Key figures around 0715 GMT -

Tokyo - Nikkei 225: UP 0.3 percent at 32,493.89 (close)

Hong Kong - Hang Seng Index: DOWN 2.0 percent at 19,019.85

Shanghai - Composite: DOWN 0.4 percent at 3,197.82 (close)

London - FTSE 100: FLAT at 7,406.57

Euro/dollar: UP at $1.1251 from $1.1244 on Monday

Dollar/yen: DOWN at 138.48 yen from 138.70 yen

Pound/dollar: UP at $1.3088 from $1.3075

Euro/pound: DOWN at 85.95 pence from 85.97 pence

West Texas Intermediate: UP 0.2 percent at $74.31 per barrel

Brent North Sea crude: UP 0.2 percent at $78.62 per barrel

New York - Dow: UP 0.2 percent at 34,585.35 (close)

T.Rivera--SFF