Asian markets fall after overnight Wall Street retreat

Tokyo led a sell-off in Asian markets on Tuesday after Wall Street pulled back from record levels in overnight trade and with Japan fearing a renewed Covid-19 surge. Both the Dow and S&P finished last week at new peaks and also posted their fourth consecutive weekly gains, following on the heels of strong data for American housing starts, employment and retail sales.

But analysts said that a combination of dollar weakness and a lull in fresh data ahead of upcoming corporate results had conspired to tamp down enthusiasm.

“It seems like investors might be having a bit of a second thought up here as US earnings season starts to heat up and peak optimism is beginning to set in,” said Stephen Innes of Axi.

Investors were looking to “cash in some chips” to move back into real world assets, he added, citing the big drop in bitcoin down to around $54,700 on Tuesday. The digital currency had crept above $62,000 in a fresh high last week despite bubble concerns.

The Nikkei was down nearly two percent at the break after investors took in calls for new states of emergency in the Osaka region and possibly Tokyo, prompted by rising case numbers.

The new measures could involve tougher restrictions including asking shops and restaurants to close, according to local media.

“Along with increased new coronavirus infections, the possibility of a state of emergency declaration is growing, which is turning on an amber light for economic recovery,” Okasan Online Securities said in a commentary.

A weak greenback against the yen and other benchmark currencies was also weighing on Japanese trade. “US dollar weakness… mostly appears to be driven by European strength,” said NAB analyst Rodrigo Catril.

“The market has become slightly more optimistic around the European vaccine rollout and economic outlook of late… As the rollout picks up, European equities should also start to outperform,” he wrote in a note.

Wall Street’s dream run was also likely to lose momentum with an ongoing Senate battle in Washington over the size of proposed corporate tax increases and the extent of infrastructure stimulus, Catril added.

Hong Kong was down 0.1 percent in morning trade but Shanghai pared back an opening dip to rise the same amount. Sydney was down 0.3 percent ahead of a Reserve Bank meeting analysts said was unlikely to move the market, while Mumbai finished Monday 1.8 percent lower as the country battles a snowballing Covid outbreak.

Oil builds up strength

Oil’s forward curve continued on Tuesday with both major benchmarks up by at least 0.5 percent, a year after the pandemic pushed them into negative territory. Innes cautioned the commodity was still “trading on a jittery note” in the wake of rising Covid cases in Asia.

Expectations that the US and Iran could eventually return to a nuclear deal, potentially within weeks, was also stabilising price growth, he added.