Global Stocks Slide on Poor Economic Data from China; Bearish Sign for the Economy
Global stocks and US futures took a hit on May 26 as unfavorable economic data from China dampened trader hopes for a rapid post-pandemic recovery in the world’s second-largest economy. As a result, markets in Asia experienced a massive slump, leading lower their counterparts in Europe and the US. Meanwhile, preliminary data from Germany showed a slowdown in annual consumer price inflation to 6.1% in May, down from 7.2% the previous month, adding to signs that price pressures are rapidly easing across the region. In France, inflation fell to 6% in May, its lowest level in a year, fueling hopes that the European Central Bank is nearing the end of its tightening cycle. The following is an in-depth analysis of the factors that contributed to these economic changes and what the future holds.
Chinese Economy Under Pressure
China’s economy recorded its weakest activity in April 2021, with the official manufacturing Purchasing Managers’ Index (PMI) coming in below expectations. The country’s non-manufacturing PMI followed suit, indicating that the economy had slowed down. Rising commodity prices and supply chain disruptions due to the pandemic have exacerbated the economic situation, and this is expected to continue well into the third quarter. Although China’s economy still exhibited slight growth in the second quarter compared to the first quarter, the data indicates that it is currently under a great deal of pressure. Global markets have been anticipating a rise in demand for Chinese goods and services, but the recent data has put a damper on those hopes.
Inflation in Europe
In May, the inflation rate in France fell below analyst expectations to 6%. At the same time, Germany’s preliminary consumer price data showed a monthly increase of 0.5%, keeping the annual rate at 2.5%. In both countries, prices were mainly driven up by household energy costs, which saw a rise of 8.7% in France and 3.7% in Germany, followed by food prices, which went up by 1.7% in both countries. The easing of inflationary pressure is in line with comments made by European Central Bank (ECB) President Christine Lagarde, who indicated that prices were unlikely to rise too much above the 2% inflationary target the bank is aiming for.
US Debt Ceiling Deal
The US Congress on May 25 passed a bipartisan bill to raise the $31.4 trillion debt ceiling for two years. However, before it can be implemented, both the House of Representatives and the Senate must approve it. Should it not pass, the US government could run out of cash in early June, which would have dire consequences for the economy. The US Treasury has already started taking measures to buy time by suspending investments for state and local governments, leaving little wiggle room for investors.
The Current Situation
Several factors are currently affecting the global economy, and they are all linked to one another. China’s economy is struggling to keep up due to price hikes and supply chain disruptions, which in turn is affecting global markets. As a result, investors are looking for inflationary signals that would indicate a shift in the Central bank’s monetary policy. At the same time, the US Congress is wrestling with the debt limit, which, while not directly affecting the global economy, could have serious repercussions and delay the country’s economic recovery. The following are some of the factors to consider when analyzing these developments.
Technology Stocks
Technology stocks, including Amazon, Apple, Alphabet, and Facebook, were some of the worst-performing stocks on May 26 as they saw a decline in value. This was the third consecutive day of losses in the technology sector, and it is due in no small part to concerns about high inflation. For instance, Apple and Alphabet both saw a decline of 1.6%, while Facebook saw the day’s biggest decline of 2.1%. However, it is essential to note that Goldman Sachs’ US equities strategist, Arjun Menon, cited multiple factors for the sector’s poor performance. First, he noted that technology stocks tend to underperform in an inflationary environment. In addition, rising interest rates make future cash flows less valuable, leading to lower stock prices. Finally, the sector already had a massive run-up in 2020 when the pandemic was at its peak, leading to lofty valuations that could not be sustained.
Long-Term U.S. Treasury Bonds
Long-term US Treasury bonds have experienced dramatic fluctuations, with the yield on monetary policy-sensitive two-year bonds falling 0.05 percentage point to 4.43%. The yield on the 10-year benchmark bond also fell 0.05 percentage points to 3.65%. While these numbers are likely to fluctuate further as investors wait for the outcome of the debt ceiling negotiations in the US, they indicate some steadying of the market. Several factors could be contributing to the improved outlook for Treasury bonds. Firstly, the Biden Administration has implemented a range of interventions aimed at stabilizing the economy, such as providing direct payments to individuals and businesses. The Federal Reserve has also been tasked with implementing monetary policy aimed at bolstering employment and stabilizing the economy.
Crypto Market
The crypto market has also experienced a bumpy ride during the same period. Bitcoin, the biggest cryptocurrency, was down 1.9% to $38,4389 by 7 AM ET (1100 GMT), while ether sank by 5.2% to $2,647. One theory among investors is that the losses are linked to fears about inflation and aggressive monetary policy. However, more shrewd investors are pointing to the internal politics of the currencies themselves. Recent reports have been raising concern about the concentration of power among a few miners, who stand to gain from the currency’s success but also have been known to take large profits from the market. This development raises questions about the cryptocurrency’s viability and sustainability over the long term.
The Future of the Global Economy
The future of the global economy is uncertain and dependent on a complex array of factors. Although the inability of China’s economy to keep up with the post-pandemic recovery is a cause for concern, the signs of easing inflation in Europe are a more positive development. The US Congress’s imminent vote on the debt ceiling also weighs heavily on the outlook for the global economy. The cryptocurrency market is still in a state of flux and is likely to experience continued fluctuations. As these various factors interact with one another, the future state of the global economy is still very much in flux. However, with proper strategic interventions, there are reasons to remain optimistic that a full recovery could be achieved in the not-too-distant future.
Summary
Poor economic data from China dampened trader hopes for a rapid post-pandemic recovery in the world’s second-largest economy. Global markets have been anticipating a rise in demand for Chinese goods and services, but the recent data has put a damper on those hopes. Meanwhile, in Europe, there are signs of easing inflation, which is a more positive development. The US Congress’s imminent vote on the debt ceiling also weighs heavily on the outlook for the global economy. The cryptocurrency market is still in a state of flux and is likely to experience continued fluctuations. As these various factors interact with one another, the future state of the global economy is still very much in flux.
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Global stocks and US futures slipped on Wednesday as poor economic data out of China dampened traders’ hopes of a quick post-pandemic recovery in the world’s second-largest economy.
Europe’s Stoxx 600 fell 0.2%, Germany’s Dax lost 0.3%, France’s Cac 40 fell 0.5% and London’s FTSE 100 was unchanged.
Markets in the region were led lower by Asia, where China’s CSI 300 index dropped 1% after the country’s statistics office reported a contraction in manufacturing activity in May, challenging analysts who they waited for an expansion.
“Far from being the powerhouse that will offset America’s slowdown, China’s economic recovery from the pandemic looks more precarious,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
Hong Kong’s Hang Seng China Enterprises Index fell 2%, putting the benchmark more than 20% off its recent peak in January and into bearish territory.
Meanwhile, preliminary data in Germany showed annual consumer price inflation slowed to 6.1% in May, down from 7.2% the previous month, adding signs that price pressures are abating. rapidly easing across the region.
In France, inflation fell to 6% in May, its lowest level in a year, and below analysts’ forecasts, fueling hopes that the European Central Bank is nearing the end of its tightening cycle.
Italy is expected to release its inflation results later in the day, with eurozone data due out on Thursday.
Meanwhile, contracts tracking Wall Street’s benchmark S&P 500 and those tracking the heavyweight Nasdaq 100 both fell 0.4% ahead of the New York open.
The moves follow choppy trading from the previous session as traders feared that Congress would be able to push through the US debt ceiling deal before the government ran out of money in early June.
The bipartisan bill, agreed on Saturday, would raise the country’s $31.4 trillion debt ceiling for two years, but first it must pass both houses of Congress, with traders set for a vote in the House of Representatives later Wednesday.
The yield on US Treasuries due next month – around the date the government could run out of cash – fell to 5.2%, after hitting its highest level in at least 20 years last week. Bond yields rise when prices fall.
Pressure on long-term Treasuries eased, with the yield on monetary policy-sensitive two-year bonds falling 0.05 percentage point to 4.43%. The yield on the 10-year benchmark bond fell 0.05 percentage points to 3.65%.
“Most of the risk of the debt ceiling issue is off the table, the market is paralyzed, it seems, until this issue is legally settled,” said Mike Zigmont, head of research and trading at Harvest Volatility .
https://www.ft.com/content/01587255-4425-4dba-9ca0-4de4229e0148
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