Stocks struggle as Chinese rate cut pushes oil down
Global equities struggled to move forward Monday as investors digested the news of an unexpected cut in Chinese interest rates as data pointed to faltering growth in the world’s second-largest economy, pushing oil prices down nearly 2 percent.
Weaker futures on the US stock index also weighed on sentiment, while a more stable dollar knocked gold.
The MSCI index for all countries was barely firmer, as a month-long rise has softened the benchmark’s decline for the year to around 13 percent.
China’s central bank cut key interest rates to boost demand as data showed the economy slowed unexpectedly in July, with factory and retail activity weighed down by Beijing’s zero-COVID policy and a real estate crisis.
So far, investors have struggled with how much further central banks in the United States and Europe would raise interest rates when they meet next month.
Hopes of smaller rate hikes for signs that US inflation could peak helped Wall Street record its fourth straight week of gains on Friday.
Earnings on Wall Street and steady growth figures for Japan propelled the Nikkei stock average in Tokyo to its highest point in more than seven months.
“China, I think, is a different situation from the rest of the world. They have a self-imposed recession that they created based on the zero-COVID policy,” said Patrick Armstrong, chief investment officer at investment house Plurimi Group.
“I think it will be fed by the Fed when there is another leg down in the markets. Quantitative tightening, I think, will start in earnest in September and that will take away the liquidity of the market,” said Mr. Armstrong.
Markets still give about a 50 percent chance that the Fed will raise 75 basis points in September and that yields will rise to about 3.50-3.75 percent by the end of the year.
The Fed will release the minutes of its latest rate-setting meeting on Wednesday, but investor hopes to show the central bank is starting to turn on rate hikes could be dashed.
“I don’t think (Fed Chairman) Powell is going to say that, I don’t think the minutes will indicate that,” said Mr. Armstrong.
In Europe, the STOXX stock index of 600 leading companies rose 0.13 percent to 441.43 points, still up about 10 percent for the year.
Image: Fed Interest Rate Futures and Stocks
Convenience of US futures
S&P 500 futures and Nasdaq futures both fell about 0.5 percent after last week’s gains.
Revenues from major retailers, including Walmart and Target, will be examined for signs of declining consumer demand.
The cut in Chinese interest rates failed to stop the Chinese blue chips from falling 0.13%, while the yuan and bond yields also fell.
Geopolitical risks remain high with a delegation of US lawmakers in Taiwan for a two-day trip.
The bond market still appears to be in doubt about the Fed’s ability to land a soft landing, while the yield curve remains deeply inverted. The two-year yield of 3.27 percent is well above that of 10-year bonds, which traded at 2.86 percent.
Those returns have supported the US dollar, although it fell 0.8 percent against a basket of currencies last week as risk sentiment improved.
But on Monday, the dollar regained some equilibrium, falling 0.2 percent against the euro greenback at $1.02345, after rising 0.8 percent last week. Against the yen, the dollar stabilized at 133.51 after losing 1 percent last week.
“We still feel that the dollar rally will resume in the foreseeable future,” said Jonas Goltermann, senior economist at Capital Economics.
Gold fell 0.8 percent to $1,786 and lost nearly all of its 1 percent gains last week.
Oil prices fell as China’s disappointing data heightened concerns about global fuel demand.
The head of the world’s largest exporter, Saudi Aramco, said it was ready to ramp up production as production resumes at several offshore platforms in the US Gulf of Mexico after a brief hiatus last week.
Brent fell 1.8 percent to $96.35, while US crude fell 1.9 percent to $90.34 a barrel.
