Asian shares hesitant on China inflation data, US bank jitters

Asian shares were on the defensive on Wednesday (9 August) after China inflation data confirmed the recovery in the world's second-biggest economy is losing steam while resurfacing concerns about US bank stability also capped sentiment.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.1% after a 1.2% tumble a day earlier. Japan's Nikkei .N225 slipped 0.1%.

The much-watched data on Wednesday showed China's consumer prices fell 0.3% in July from a year ago, slightly better than expected but the first decline since February 2021. Producer prices dropped for the 10th consecutive month. The data followed disappointing trade figures a day earlier that fuelled concerns about the global economic outlook.

China's blue chips .CSI300 eased 0.2% while Hong Kong's Hang Seng index .HSI fell 0.5%.

Chinese property developers listed in Hong Kong .HSMPI dropped 0.5% after a 4.8% plunge a day earlier, as worries about the sector, a major pillar of economic growth, persisted.

"China is once again facing renewed headwinds posed by the 3D challenge of debt, demographics and deflation," said Chetan Ahya, chief Asia economist at Morgan Stanley.

"We think China is better-placed than Japan in the 1990s. It should be less challenging to prevent China from falling into a persistent debt-deflation loop."

Carol Kong, a currency strategist at CBA, said fading base effects and government policy support suggested deflation was likely to be short-lived.

Overnight, Wall Street finished lower in a broad sell-off after the downgrading of several lenders by Moody's reignited fears about the health of US banks and the economy. The Dow .DJI fell 0.5%, the S&P 500 .SPX lost 0.4% and the Nasdaq Composite .IXIC dropped 0.8%. .N

The Italian government also shocked markets on Tuesday by setting a one-off 40% tax on profits made by banks from higher interest rates, sending regional banking shares .SX7E down 3.5%.

It later said the new tax on banks would not amount to more than 0.1% of total assets, in a move that could lead to a rebound in European banking shares on Wednesday.

Longer-term Treasury yields slipped further in Asia after solid interest for the $42 billion sale of three-year notes. 10-year yields US10YT=RR slipped 2 basis points to 4.004%, after falling 5 basis points overnight to as low as 3.9840%, a one-week trough.

The rates-sensitive two-year yields US2YT=RR eased 1 basis point, after ending the previous session largely flat.

Markets are waiting for the US inflation report on Thursday, which is expected to show headline inflation picking up slightly in July to an annual 3.3% pace, while the core rate is seen unchanged at 4.8%.

The US dollar =USD held gains at 102.49 against a basket of currencies, having risen 0.5% overnight on safe-haven demand.

The risk-sensitive Australian dollar AUD=D3 breached a key support level overnight before bouncing back to $0.6536.

Elsewhere, oil prices were marginally lower. Brent crude futures LCOc1 eased 0.2% at $86.02 per barrel and U.S. West Texas Intermediate crude futures CLc1 also fell 0.2% to $82.73.

The gold price XAU= was slightly higher at $1,927.67 per ounce.