Asian markets dipped on Monday, receiving little boost from China’s unexpected rate cut, while Wall Street futures gained following President Joe Biden’s decision to withdraw from the upcoming election.
China’s central bank, the People’s Bank of China, reduced short-term rates by 10 basis points, subsequently lowering long-term borrowing costs and bond yields. This move followed the release of a policy document by Beijing outlining its economic goals. However, investors seemed unimpressed, interpreting the rate cut as a sign of underlying economic weakness. Chinese blue chips (.CSI300) fell 0.9%, accompanied by a drop in the yuan.
“Fundamental factors indicate China needs a lower rate environment, especially given the high real rate in this disinflationary context,” said Gary Ng, Asia-Pacific senior economist at Natixis in Hong Kong. “The urgency from authorities to stimulate the economy suggests its current state is not robust.”
The MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) lost 0.7%, following a 3% decline last week. Japan’s Nikkei (.N225) fell 1.2%, South Korea’s benchmark index (.KS11) dropped 1.3%, and Taiwan (.TWII) faced a 2.3% decline amid concerns over U.S. restrictions on chip sales.
In the U.S., markets responded calmly to President Biden’s announcement to step down, endorsing Vice President Kamala Harris for the Democratic ticket. Online betting site PredictIT showed Donald Trump’s victory odds dropping to 60 cents, while Harris’ rose to 39 cents. California Governor Gavin Newsom trailed at 4 cents.
Market reactions were measured, with S&P 500 stock futures nudging up 0.1% and Nasdaq futures increasing by 0.2%. Futures for 10-year Treasuries rose slightly, while 10-year bond yields dipped by 2 basis points to 4.22%. EUROSTOXX 50 futures added 0.5%, and FTSE futures firmed by 0.4%.
“As Trump’s polling results have improved, markets have favored positions anticipating more trade barriers and possibly higher inflation,” noted analysts at ANZ. “Some polls suggest Harris performs better against Trump than Biden, potentially boosting the Democrats in upcoming polls.”
Eye on Earnings
A busy week of corporate earnings includes reports from Tesla (TSLA.O), Google-parent Alphabet (GOOGL.O), General Electric (GE.N), General Motors (GM.N), Ford (F.N), and Lockheed Martin (LMT.N). The tech sector is projected to see a 17% year-over-year earnings increase, with the communication services sector expected to rise by 22%. These gains outpace the estimated 11% increase for the S&P 500 overall, according to LSEG IBES.
European banks also report this week, with attention on whether gains from higher interest rates have peaked and if political uncertainties are affecting sentiment.
Economic Indicators
A packed week of economic data will conclude with the Federal Reserve’s favored inflation measure, the core personal consumption expenditures index, expected to show a 0.1% rise in June, pulling the annual pace down to 2.5%. Markets are betting heavily on a September rate cut, with futures pricing a 97% chance.
Advance GDP figures are forecast to show growth accelerating to an annualized 1.9% in Q2 from 1.4% in Q1. The Atlanta Fed GDPNow indicator suggests growth could reach 2.7%, indicating potential upside risk.
The Bank of Canada is expected to cut its rates by a quarter point to 4.5% at its meeting on Wednesday.
Market Movements
In currency markets, the dollar gave back some of last week’s gains as the euro edged up 0.1% to $1.0886. The dollar slightly weakened against the Japanese yen, at 157.27.
In commodities, gold held steady at $2,406 an ounce, below last week’s record high of $2,483.60. Oil prices inched higher with Brent crude gaining 44 cents to $83.07 per barrel, and U.S. crude rising 41 cents to $80.54, amid ongoing conflict in Gaza.
