Chinese stocks fell into bear market territory but Wall Street futures moved higher on Tuesday, as traders were encouraged by a long-awaited agreement on the US debt ceiling.
The Hang Seng China Enterprises index was down during Asian trading on Tuesday, pushing it 20 per cent lower from its peak in January. That temporarily placed it in bear market territory, although it later rallied to close up 0.5 per cent.
China’s benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks was also down more than 10 per cent from its peak this year, matching the technical definition of a market correction, although it also later rallied to close marginally up.
Pressure on Chinese stocks follows mounting worries over the outlook for the world’s second-largest economy as tensions rise between Washington and Beijing.
In Europe, the region-wide Stoxx 600 rose 0.2 per cent and Germany’s Dax gained 0.5 per cent, as markets reopened after a long weekend.
US stock futures were higher, with contracts tracking Wall Street’s benchmark S&P 500 up 0.6 per cent and those tracking the tech-heavy Nasdaq 100 up 1.2 per cent ahead of the New York open.
The firm tone was helped by the hammering out on Saturday of a last-minute deal between US lawmakers and the White House, which would raise the country’s $31.4tn debt ceiling for two years, until after the next presidential election in late 2024.
Although the bipartisan bill still needs to pass both chambers of Congress in the coming week, with traders poised for the first vote in the House on Wednesday, it also helped ease pressure on US Treasuries.
The yield on policy-sensitive two-year bills fell 0.07 percentage points to 4.52 per cent. The yield on the benchmark 10-year note was down 0.1 percentage points to 3.72 per cent. Bond yields fall as prices rise.
In foreign exchange markets the Turkish lira weakened to 20.34, hitting a new record low after President Recep Tayyip Erdoğan secured victory in the country’s election over the weekend.
For Chinese equities, the relentless sell-off reflects a growing consensus among investors that the country’s economic recovery is losing steam, roughly half a year after Beijing abandoned President Xi Jinping’s disruptive zero-Covid 19 policy.
Winnie Wu, China equity strategist at Bank of America, said clients had described many Chinese stocks as “too cheap to short but not good enough to go long”.
Wu said that while valuations for China shares had become attractive, the recovery remained weaker than anticipated and the economy was likely to continue underperforming without more substantial state support.
Worsening geopolitical tensions with the US have also stoked worries among foreign investors, accelerating the sell-off. Traders said losses on Tuesday were partly spurred by China’s decision to decline a request from the US for a meeting between defence officials at an upcoming security forum in Singapore.
“It’s the economy, yes, but it’s also more than that,” said Louis Tse, managing director at Hong Kong-based brokerage Wealthy Securities.
In addition, Tse said the interest rate differential between the US and China was driving outflows from China’s government bond market, adding to downward pressure on the renminbi.
“US and European fund managers don’t want to hold Chinese assets in their portfolios right now,” Tse said. “The economy, the risk premium from US-China tensions, slim market turnover and the renminbi — all of these are coming together to drive more selling.”
Source: Economy - ft.com
