(Bloomberg) -- Asia’s stock benchmark briefly erased its gain for the year, as worries about higher-for-longer interest rates and geopolitical tensions triggered losses across the region.

The MSCI Asia Pacific Index fell as much as 0.4% Wednesday before paring losses, with consumer discretionary and industrials among the biggest drags. The measure was hovering around 169.39, the closing level reached on the last trading day of 2023, after Federal Reserve Chair Jerome Powell signaled policymakers will wait longer than previously anticipated to cut interest rates.

Asia’s “markets are a bit more vulnerable to the combination of geopolitical shocks in the Middle East and rapid shift in interest rate expectations, as they have been operating on lower rates and tend to rely heavily on energy imports and external demand,” said Homin Lee, senior macro strategist at Lombard Odier. “We see volatility persisting in the near-term and remain neutral.”

The repricing of Fed rate bets, a stronger dollar, a flare-up in Middle East tensions and a slow economic recovery in China are creating headwinds for Asian stocks, which had gained more than 5% at one point in 2024. The pullback has even drawn in high-flying chip stocks and Japanese shares as investors take risk off the table.

Still, Hong Kong stocks were little changed while mainland China gauges sharply rebounded from Tuesday’s losses that were driven by mixed economic data. Chinese small-caps rose, paring this week’s selloff, as the nation’s top securities regulator sought to ease concern over the potential delisting of firms with weak financial health.

Overseas investors have sold more than $2.2 billion worth of equities on a net basis in emerging Asia excluding China in April, according to latest data compiled by Bloomberg. The bulk of the selling happened this week.

Other bleak milestones are flashing across the region as the 10-day historical volatility on the MSCI index spikes. The Australian stock benchmark briefly erased its 2024 gains on Tuesday while South Korea’s small-cap gauge remains on the verge of entering a technical correction. 

Sectors to Watch

• Japanese semiconductor stocks declined after Dutch chip-equipment company ASML’s new orders fell short of analysts’ expectations.
• Chinese hydrogen-related stocks surge after a report that a local government is planning to boost the usage of clean energy and further develop related infrastructure.
• Shares of Melco International and Galaxy Entertainment fall after they were downgraded by JPMorgan, which cited disappointing recovery and “modest” drops in Ebitda.
• LS Electric and other power equipment stocks in South Korea advance, after Macquarie said it expects an upcylce in the power distribution market this year.

Markets at a Glance

• MSCI Asia Pacific Index fell 0.2%
• Japan’s Topix Index fell 1.3%; Japan’s Nikkei Index fell 1.3%
• China’s CSI 300 Index rose 1.5%; Hong Kong’s Hang Seng Index was little changed; Hong Kong’s Hang Seng China Enterprises Index rose 0.1%
• Taiwan’s Taiex Index rose 1.6%
• South Korea’s Kospi Index fell 1%; South Korea’s Kospi 200 Index fell 1.1%
• Australia’s S&P/ASX 200 Index fell 0.1%; New Zealand’s S&P/NZX 50 Gross Index rose 0.6%
• Singapore’s Straits Times Index rose 0.6%; Malaysia’s KLCI Index rose 0.4%; Philippines’s PSEi Index rose 0.7%; Indonesia’s JCI Index fell 0.5%; Thailand’s SET Index fell 2.3%; Vietnam’s VN Index fell 1.9%
• 10-year Treasury yield fell 2.3 basis points
• Cboe Volatility Index fell 0.42 points
• Bloomberg Dollar Index fell 0.2%
• West Texas Intermediate crude fell 0.5% to $85 a barrel
• Euro rose 0.2%

Here Are the Most Notable Movers

• Rio Tinto rises as much as 2.2% after the diversified miner reported its first quarter results, saying it expects steel exports out of China to remain historically elevated and to support iron ore demand. The company saw higher year-on-year copper output and a beat in alumina and aluminum production. Peers Norsk Hydro, Anglo American and Boliden also edged higher.
• LY Corp. falls as much as 5.9%, leading declines on the Nikkei 225 on Wednesday, after the operator of Yahoo! Japan and messaging system LINE received additional administrative guidance from a government ministry related to a data leak announced last year.
• Oriental Land falls as much as 4.3%, the most since March 8. Jefferies cut its price target on the Tokyo Disney Resort operator, saying that the risk of selling pressure from large shareholders will likely weigh on the stock.
• Air China shares gain as much as 2% in Hong Kong after Citigroup opened a positive catalyst watch for the stock on expectation of pent-up domestic and international travel demand in the upcoming Labor Day holiday.
• Shares of Sunny Optical Technology, whose products include mobile phone cameras, rise as much as 3.5% after Citi put the stock on a 30-day upside catalyst watch. The broker says Huawei phone model Pura 70’s debut in April may potentially be positive for Sunny’s shares.
• Resonac shares surge as much as 15%, the most since March 2020, after the chemical products maker boosted its operating income forecast, beating the average analyst estimate.
• Shares of DroneShield rally as much as 17% to a record high, after the Sydney-listed drone detection developer said the NATO Support and Procurement Agency approved a three-year procurement framework agreement.
• With Taiwan Semiconductor Manufacturing Co. still trading at pedestrian valuations even after surging to a record high, there is potential for its upcoming results to drive the stock even higher.
• Bank of Queensland shares rally as much as 5.9%, the most since October 2022, after the Sydney-listed lender reported cash profit for the first half-year that beat the average analyst estimate.

Related Market News

• Taking Stock: Japanese stocks have surged so much since last year that investors’ high expectations may be getting out of hand, punishing even companies with decent earnings.
• Inside Asia: The South Korean won outperformed Asian peers as the nation’s officials voiced a string of warnings against the currency’s weakness. The Philippine peso falls as the central bank governor signals rate cuts.
• Global Wrap: European stocks gained, with positive earnings from some of the region’s biggest companies lifting the mood after markets were roiled by a more hawkish outlook for interest rates.

Notes From the Sell-Side

• Corporate earnings will need to do the heavy lifting to drive a further rally in stocks, as investors worry about higher-for-longer interest rates and geopolitical uncertainty, according to Barclays strategists.
• US corporate earnings are set for a “healthier runway” through 2024 and investors are growing more confident that companies can meet expectations, according to Morgan Stanley strategists.
• Italian and Spanish stocks are likely to see a boost from improving economic activity and a decline in European interest rates, according to Goldman Sachs strategists.
• Investor sentiment on China stocks is improving “on the margin” as allocations tick up for the second month in a row and now many expect stronger economic growth, according to Bank of America’s monthly fund manager survey.

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