Global stocks drop on China clampdown at start of data-packed week

China’s national flag is seen outside the Embassy of The People’s Republic of China in Kuala Lumpur January 26, 2018. — Picture by Miera Zulyana
China’s national flag is seen outside the Embassy of The People’s Republic of China in Kuala Lumpur January 26, 2018. — Picture by Miera Zulyana

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LONDON, July 26 — Stock markets fell today as concerns over tighter regulations in China mounted amid caution ahead of a huge week for US corporate earnings and the Federal Reserve meeting.

They key event of the week for markets is the Fed meeting, where investors will look for Chair Jerome Powell’s comments about the timing for the start of tapering of the central bank’s asset purchases.

This week also sees more than one-third of S&P 500 companies report quarterly results including Facebook Inc, Tesla Inc, Apple Inc, Alphabet Inc, Microsoft Corp and Amazon.com.

Forecast-beating earnings have helped fuel this year’s stock rally but the question is whether it can last or if the optimism has been priced in.

By 0810 GMT, the Euro Stoxx 50 was 0.87 per cent lower, the German DAX 0.51 per cent weaker and Britain’s FTSE 100 off 0.64 per cent.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 2.1 per cent to its lowest since December.

Wall Street looked set to open lower but remained near record highs.

Elsewhere, bitcoin jumped as much as 12.5 per cent to its highest since mid-June on hopes of growing acceptance of the cryptocurrency including from Amazon and as short sellers covered their positions.

The world’s biggest cryptocurrency was last up 7.5 per cent at US$38,076 (RM161,042) -while ether was 6 per cent higher at US$2,324.

“While we see the Fed as being more hawkish this week, it is only one of several speed bumps ahead in what is an environment supportive for risk,” said Sebastien Galy, a strategist at Nordea.

“The current profit taking induced in part by pressure on China’s Tech is unlikely to last long as US stocks should again be bought on the dip.”

Weighing on sentiment today, however, was China. Chinese blue chips shed 4.4 per cent to their lowest since December, in what was also the biggest daily decline in more than a year, as the education and property sectors were routed on worries over tighter government rules.

Investors have been pulling money out of Asian and emerging market stocks and adding to their US holdings, supported by forecast-beating earnings — with just over one-fifth of the S&P 500 having reported, 88 per cent of firms have beaten the consensus of analysts’ expectations.

Oliver Jones, a senior markets economist at Capital Economics, noted US earnings were projected to be roughly 50 per cent higher in 2023 than they were in the year immediately prior to the pandemic, significantly more than was anticipated in most other major economies.

“With so much optimism baked in, it seems likely to us that the tailwind of rising earnings forecasts, which provided so much support to the stock market over the past year, will fade,” he cautioned.

The week is also packed with US data. Second-quarter gross domestic product is forecast to show annualised growth of 8.6 per cent, while the Fed’s favoured measure of core inflation is seen rising an annual 3.7 per cent in June.

Bond yields fall

Bond markets have remained remarkably untroubled by the prospect of eventual tapering. Yields on US 10-year notes have fallen for four weeks in a row — they slipped another 6 basis points to 1.229 per cent today.

The drop has done little to undermine the dollar, in part because European yields have fallen even further amid expectations of continued massive bond buying by the European Central Bank.

German benchmark 10-year yields fell 3 basis points today to a 5-1/2 month low of -0.442 per cent.

Chris Scicluna, head of economic research at Daiwa Capital markets, said yields were falling because of geopolitical worries and tighter Chinese regulations.

“These developments compound fears about the medium-term outlook for global growth, which is one of the factors that has been pushing yields down,” he said.

Investors have also reversed their long-standing dollar short position, data shows, with the dollar index near four-month highs.

The euro was unchanged today, hovering around US$1.1773 but not far from its 2021 low of US$1.1704.

Oil prices have been buoyed by wagers that demand will remain strong as the global economy gradually opens and supply stays tight, but they fell today.

Brent weakened US$1.32 to US$72.78 a barrel, while US crude declined US$1.47 to US$70.6. — Reuters

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