Concerns Over Health of Chinese Economy Weigh on Global Stocks
Global stocks lost ground for a third straight week on concerns over the health of the Chinese economy and higher government bond yields. The blue-chip S&P 500 and technology focussed Nasdaq indices fell 2.0% and 2.1% respectively.
Investors have reduced exposure to China as hopes of a post-pandemic recovery fade but the pace of selling accelerated last week after the country’s troubled property sector moved back into the spotlight.
Country Garden, China’s largest property developer, warned that it is facing the biggest difficulties in its history and confirmed it has missed interest payments on two of its bonds. Its sales slumped 34% year-on-year in July and its share price has fallen to a record low.
The property market in China is important as it accounts for around a quarter of economic activity. Its boom was fuelled by debt and the downturn since authorities started to crackdown on the sector in 2020 has seen many casualties.
The government’s decision to stop reporting the youth unemployment rate last week further undermined confidence. The National Bureau of Statistics reported than the jobless rate amongst 16 to 24 year olds living in urban areas rose to a record 21% in June but it opted to suspend publishing the data for July, citing the need to improve the quality of the data it collects.
The Communist Party’s politburo had promised to step up stimulus measurers to boost the economy at its meeting in July but investors are still waiting for any meaningful action. Thus far the measures announced have been incremental, including interest rate cuts on short and medium-term lending.
Rising government bond yields also weighed on sentiment last week. US 10-year Treasury yields, which move inversely to prices, climbed to their highest level since 2007 despite expectations that the worst of the inflation shock is behind us.
Many investors have been wrong footed by the strength and resilience of the US economy and are scaling back bets of how quickly the Federal Reserve will cut interest rates next year. Multi-decade low unemployment has enabled consumer spending to hold up against the sharp increase in the cost of living. The Federal Reserve Bank of Atlanta predicts the US economy will expand at an annualised rate of 5.8% in the third quarter.
The UK economy is also holding up better than most expected, supported by the strength of the jobs market. Wages rose 7.8% in the second quarter, the fastest annual pace since records began in 2001, or 8.2% including bonuses.
Higher wages make the Bank of England’s task of bringing inflation down more difficult. Money market futures are now pricing in the BoE’s benchmark interest rate reaching 6% by the end of the year.
In company news, shares in BAE Systems fell 5% on Thursday after it announced its biggest acquisition ever, a $5.6 billion deal for Ball Aerospace. The purchase will expand the British defence company’s presence in space technologies, a sector in which it has lagged its rivals.
Shares in BAE Systems have surged governments have ramped up military spending in the wake of Russia’s invasion of Ukraine in February 2022 but some analysts felt that it had paid a substantial premium to outbid competitors for Ball Aerospace.
Brent crude edged lower to $84 a barrel on concerns demand from China, the world’s largest importer of crude oil, will weaken as its economy slows. In contrast, European natural gas futures spiked by as much as 40% on Thursday in reaction to the threat of strike action by workers at Australia’s second largest LNG plant.
Unions representing workers at Woodside Energy’s North West Shelf plant, which accounts for around 4% of global LNG supply, are demanding pay rises and improved job security to avert a strike. Although Europe imports very little of its LNG from Australia, any disruption to supplies could push Asian countries, including China, Japan and South Korea, into competition with Europe for gas from Qatar and the US.
(Cover Image Source: Werner Sevenster)