European and Asian stocks declined on Tuesday as traders anticipated the European Central Bank raising interest rates and Covid-19 lockdowns in China added to fears for global economic growth.
The Stoxx Europe 600 lost 0.3 per cent in early dealings following two days of gains after US retail sales data indicated that rate rises by the Federal Reserve had not yet affected consumers’ willingness to spend.
Hong Kong’s Hang Seng index shed as much as 1.4 per cent and China’s CSI 300 fell as much as 1.3 per cent. Japan’s Topix gained 0.5 per cent.
The ECB is widely expected to raise its main deposit rate, currently at minus 0.5 per cent, for the first time since 2011 on Thursday, as well as confirm plans to end an eight-year period of negative interest rates by September.
Markets are also pricing a 0.75 percentage point hike by the US central bank next week, which would take its main funds rate to a range of 2.25 per cent to 2.5 per cent.
Global stocks have dropped about 20 per cent this year as investors debated central banks’ ability to tame surging inflation without pushing economies into contraction, while the quarterly corporate earnings season has ignited concerns about a potential recession.
Wall Street banks JPMorgan and Morgan Stanley missed analysts’ earnings forecasts last week. On Monday, Goldman Sachs warned it would slow hiring while Bloomberg reported that Apple was about to do the same.
“We are going to see big downgrades to earnings forecasts and there is no monetary policy support to help markets, so it is difficult to be optimistic,” said Luca Paolini, chief strategist at Pictet Asset Management.
“The only thing that might save the situation is an improvement in China.”
In China, as many as 41 cities are now under lockdowns or district-based controls, Japanese bank Nomura said, as the nation continues to pursue its zero-Covid policy while racing to develop an effective homegrown mRNA vaccine.
The restrictions cover 264mn people in regions that account for about 18.7 per cent of the country’s economic activity, a deterioration from a week ago when just 31 cities were subject to such curbs.
China’s economy expanded just 0.4 per cent in the quarter to June year on year, widely missing analysts’ forecasts, although the weak performance fuelled speculation that Beijing would launch stimulus measures.
In debt markets, the yield on the benchmark 10-year US Treasury note added 0.01 percentage points to 2.97 per cent. German’s equivalent Bund yield moderated by 0.04 percentage points to 1.17 per cent as concerns about the eurozone economy boosted demand for lower-risk assets. Bond yields move inversely to prices.
Russia last week turned off its main gas pipeline to Germany for repairs. Fears that state-controlled gas exporter Gazprom may not restart deliveries through Nord Stream 1 when the scheduled maintenance period ends in two days have prompted EU governments to plan for an energy shock this winter that would deal a blow to businesses and exacerbate a cost of living crisis.
The euro, which fell below $1 last week, added 0.3 per cent to $1.017 on Tuesday as an anticipated ECB rate rise set a floor under the common currency.
The dollar index, which measures the US currency against six others, slipped 0.2 per cent to trade just below a 20-year high.