Stocks stumble, dollar holds firm as China weakness heightens growth concerns

U.S. dollar banknotes are shown in this illustration taken February 14, 2022. REUTERS/Dado Ruvic/Illustration

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SINGAPORE, July 15 (Reuters) – Asian stocks hit a two-year low on Friday and were heading for a weekly loss, while the dollar was set for its third week of gains as a fresh round of higher rate around the world has heightened concerns about the outlook for global economic growth.

Although bets on a 100 basis point hike by the US Federal Reserve later this month eased somewhat overnight as Fed officials ruled out the possibility, bond markets remain in the steep price increases to curb production.

China’s economy contracted sharply in the second quarter, data showed on Friday, while annual growth also slowed significantly, highlighting the colossal cost to business of widespread COVID lockdowns, which have rocked industrial production and consumer spending. Read more

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The MSCI Asia-Pacific ex-Japan equity index (.MIAPJ0000PUS) fell 0.5% in early trading to a two-year low, led by concerns over China’s property market where threats from landlords to cease mortgage payments spooked the markets.

China’s main stock index (.SSEC) was flat, while a Hong Kong-listed mainland real estate stock index (.HSMPI) fell more than 2%.

“As for the second half, we were initially quite positive, but it looks like they have more issues emerging,” Woei Chen Ho, an economist at UOB in Singapore, said of China.

“They continue to face the challenges of the resurgence of COVID-19. The real estate market offers greater pessimism and potential for crisis if they don’t manage it properly.”

Overnight, Wall Street indices fell after weaker-than-expected profits from JPMorgan Chase & Co and Morgan Stanley stoked fears of a sharp economic slowdown.

Japan’s Nikkei (.N225) edged up 0.6%, with parent company Uniqlo Fast Retailing and video game maker Nintendo leading the gains. The US dollar settled near two-decade highs against the euro and the yen, having forced the euro below $1 for the first time since 2002 this week.

The S&P 500 (.SPX) ended down 0.3%, but futures rose 0.35% in Asia after Fed Governor Christopher Waller and Fed Chairman St. -Louis, James Bullard, threw cold water on talk of a 100 basis point rate hike later in July.

“Markets may have gotten ahead,” Waller said at a summit in Idaho. Bullard also told the Japanese newspaper Nikkei that a 75 basis point hike “has a lot of merit.” Read more

The futures imply around a 30% chance of a 100bps hike and sees the benchmark US interest rate rise to around 3.6% by March next year before falling back to 3% by the end of 2023.

HIKES

This week, the Bank of Canada surprised the markets with a 100 basis point hike, the central banks of South Korea and New Zealand announced hikes of 50 basis points and the authorities of Singapore and the Philippines announced tightened their off-cycle policy to curb inflation.

U.S. retail sales data will also be a closely watched data point on Friday.

The weakness will further worry investors who believe this week’s scorching inflation figure and subsequent Thursday data showing a sharp rise in producer prices point to an unleashing of sharp rate hikes on a slowing economy.

Short-term US Treasuries were flat overnight, but the two-year yield, at 3.1217%, is about 17 basis points higher than the benchmark 10-year yield, an unusual reversal of the yield curve which often indicates a recession.

“This reversal, I think, still has a long way to go because we haven’t really properly priced this recession yet,” said ING economist Rob Carnell, who also warned stocks were in jeopardy. while rapidly rising production costs indicate a margin. tight.

In the foreign exchange markets, the US dollar is king. The euro fell as low as $0.9952 overnight and slipped 1.5% for the week. It last stabilized at $1.0030. The yen is rushing towards 140 per dollar and last bought 138.85.

“Not only has the greenback been supported by an almost continuous increase in Fed policy over the past year, but the U.S. dollar is enjoying support from safe-haven flows,” said senior investment strategist Jane Foley. currencies at Rabobank in London in a note to customers.

This reflects fears that China will struggle to meet its growth targets this year at a time when the market is worried about recession risks for Europe and the United States.

Brent crude futures held at $99.42 a barrel and gold at $1,711 an ounce, just above a one-year low overnight.

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Reporting by Tom Westbrook; Additional reporting by Vidya Ranganathan Editing by Edwina Gibbs and Jamie Freed

Our standards: The Thomson Reuters Trust Principles.

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