Global markets drop as China stimulus hopes fade

Asian and European stocks fell into the red Monday as investors await more interest-rate decisions this week and fret over the lack of a stimulus plan to kickstart the Chinese economy.

Equities enjoyed a strong run-up last week, partly on expectations Beijing would unveil economic measures following two interest rate cuts.

But a lack of new policy announcements on Monday, coupled with US markets being shut for a public holiday, weighed on sentiment as London gave up 0.7 per cent while Frankfurt and Paris both shed one per cent.

“It’s US bank holiday, which always weighs heavily on volumes,” said OANDA analyst Craig Erlam.

“The key this week will be UK inflation and the BoE. Inflation is more stubborn than hoped everywhere and if we can see signs of progress in somewhere like the UK, where it’s proving most stubborn, that could offer a lift more widely.

But he warned that “of all the major economies desperately trying to get a grip on inflation while delivering a soft landing, the UK looks least likely to achieve it.” Markets faced “continuing concerns about China’s faltering recovery” following the end of Covid restrictions, said AJ Bell investment director Russ Mould.

“The post-Covid surge anticipated in China appears to be losing momentum and there is uncertainty around how the authorities in the country might look to get things moving in the right direction.” Oil prices also stumbled on worries over energy demand from China, a key crude consumer.

On a positive note, hopes for a thaw in China-US relations were boosted as US Secretary of State Antony Blinken held meetings with President Xi Jinping and top envoy Wang Yi in Beijing.

Traders were on tenterhooks before interest rate decisions due Thursday in Britain, Norway and Switzerland following last week’s US pause and eurozone hike.

The Bank of England is widely expected to lift its key interest rate for a 13th time in a row as it struggles to bring down high inflation.

Investors are nervous over the size of the hike, as they also wait on UK inflation data due Wednesday.

The yield on Britain’s two-year bond jumped above five per cent on Monday, striking a level last seen during the 2008 global financial crisis.

Markets are also uneasy because commercial banks are ramping up their own interest rates on home loan products, in anticipation of more BoE hikes.

In turn, that threatens to slam consumer spending and worsen the UK’s cost-of-living crisis.

Michael Hewson, chief market analyst at CMC Markets UK Europe, warned higher rates were weighing on commercial real estate and house builders, “pushing up borrowing costs across the board.” Meanwhile, Susannah Streeter, head of money and markets at stockbroker Hargreaves Lansdown. said “the current reaction on markets could do the BoE’s job for it, with mortgage deals already shooting up in advance of the bank’s decisions, sucking more demand out of the economy.” The European Central Bank had last week hiked eurozone borrowing costs to a 22-year peak to dampen inflation but the US Federal Reserve hit pause, while the Bank of Japan maintained its ultra-loose monetary policy.

Investors will be closely watching Fed chief Jerome Powell’s twice-yearly testimony to Congress this week, hoping for clues about the policy board’s thinking.

The dollar edged higher and the UK pound was near a 14-month peak on Monday as investors digested a slew of monetary policy decisions by central banks last week and looked ahead to a crunch decision by the Bank of England on Thursday.

Currency market moves have been dominated by central bank efforts globally to curb high inflation, with the dollar index sliding to its biggest weekly fall since January last week after the U.S. federal Reserve skipped a rate rise.

The dollar index, which measures the US currency against six major counterparts, ticked up 0.2% to 102.480. It remained not far from a one-month low of 102.00 it touched on Friday. US markets are closed on Monday for a holiday.

Investors expect the Bank of England to hike rates by at least 25 basis points when it meets on Thursday, as it battles inflation running at more than four times its target.

The pound is changing hands near 14-month highs against the dollar on expectations UK rate rises will outpace other major economies. The pound edged down 0.2% at $1.27960.

Money markets place a 72% chance of the BoE opting for a 25 basis points hike and a 28% likelihood of a 50 basis point jump.