Photographer: Noriko Hayashi/Bloomberg
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Snowballing U.S. Volatility Is Dragging Asia Stocks Along With It

  • FANG selloff drags stock markets from Japan to China lower
  • Equity rallies around the world are getting more mature: Saxo

It happens a lot. An American company like Facebook Inc. stumbles, its stock losing $23 billion of market value in a day. And then Japanese and Chinese equities with no obvious connection erase many times that amount over the next few hours.

It’s a frustrating feeling, having your whole market sucker-punched by news an ocean away, according to Edward Lim, chief investment officer of Covenant Capital in Singapore. But it’s the furthest thing from surprising.

“I have lived through this since 1997. I can tell you, there is no such thing as decoupling,” said Lim, Covenant’s chief investment officer. “The world is so interconnected. Whatever happens in the U.S has got ramifications for Asia."

How interconnected? Consider the benchmark gauge for U.S. investor anxiety and its link to the MSCI Asia Pacific Index. As volatility snowballs in the U.S., correlations between the two measures have risen to twice what they normally are. It’s happening now, and happened in past selloffs, too.

It was the same story Wednesday in Asia. An American selloff rooted in a handful of U.S. megacaps knocked regional benchmarks down between 0.5 percent and 1 percent. This just a day after an even less explicable recovery rally in U.S. shares spurred Japan’s Topix index to its best gain since November 2016.

Unified moves are getting tighter in part because equity rallies around the world are getting more mature, said Kay Van-Petersen, a Singapore-based global macro strategist with Saxo Capital Markets. In the U.S., the advance that began at the bottom of the financial crisis is five months away from being the longest ever recorded.

"The market price action we seem to be getting is more typically to a bear market regime than a bull market regime,” Van-Petersen said. “The former is the epitome of choppy, risk-on & risk-off moments in which very few traders can successfully navigate."

With three tech companies -- Tencent, Alibaba and Sunny Optical -- accounting for a third of the MSCI China Index, Chinese offshore stocks have been impacted by the U.S. FANG selloff Tuesday, even more so than Trump’s trade war.

"The fact is sentiment is brittle in the current climate,” said Jingyi Pan, market strategist at IG Asia Pte. “The thing with sentiment-driven reactions is that it appears to simmer over time until something new turns up.”

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