Global Markets- China’s modest rate cut sends stocks lower

Global Markets: China’s modest rate cut sends stocks lower

European stocks and U.S. futures fell on Tuesday after China cut interest rates by less than expected and the market awaited more detail on Beijing’s plans to shore up a stuttering economic recovery.

China cut its benchmark loan prime rates (LPR) for the first time in 10 months on Tuesday, with a smaller-than-expected 10-basis point reduction in the five-year LPR.

“The aim (of China’s rate cut) is to bolster lending, but investors appear a little underwhelmed by the action and are waiting until further moves promised to bolster the economy materialise,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

Analysts at BofA global research said in a note that “such marginal easing” would likely help prevent growth from slowing sharply, but was “unlikely to offer a strong boost to reverse the growth slippage in the near future”.

The rate cuts are the latest in a string of moves by Beijing to shore up a slowing recovery in the world’s second-largest economy amid looming deflation risks, property market woes and high youth unemployment.

The People’s Bank of China lowered the medium-term lending facility rate on Thursday last week. The market was speculating on what China could do next to revive the recovery but was disappointed by a lack of concrete measures from a cabinet meeting on Friday.

“We probably will need to wait for China’s Politburo meeting, headed by President Xi early in July, for any concrete announcement on a new round of stimulus,” said Rodrigo Catril, senior FX strategist at National Australia Bank.

The delay in further stimulus measures weighed on sentiment, with Citi the latest in a handful of big banks to lower its growth forecasts for the Chinese economy on Tuesday.

Meanwhile, China and the United States failed to produce any major breakthrough during U.S. Secretary of State Antony Blinken’s visit to Beijing, but both sides agreed to stabilise relations to avoid veering into conflict.

“The meeting helped improve sentiment, but the market also understands that there’s strategic competition between the U.S. and China,” said Redmond Wong, Greater China market strategist at Saxo Markets.

Australian shares bucked the trend, hitting a two-month peak after minutes of the Reserve Bank of Australia’s latest policy meeting showed that a decision to hike interest rates in June was “finely balanced”. A central banker on Tuesday also hinted there was room for policy adjustment from the current path of aggressive rate hikes.

Elsewhere, British two-year government bond yields , more sensitive to rate hikes, touched a new 15-year high, edging up further above 5% as investors ramped up their bets on how fast and how far the Bank of England will raise interest rates. When a bond’s price falls, its yield rises.

German two-year bond yields dipped 3.5 basis points to 3.17% on Tuesday, after touching its highest since March on Monday, reacting to a bigger-than-expected fall in German producer prices.

Gold edged up 0.1% to $1,951.74 as the dollar index eased at 102.45 but lacked clear momentum as traders awaited U.S. Federal Reserve Chair Jerome Powell’s testimony later this week for more direction on the interest rate path. Reversing earlier declines, U.S. crude rose 0.4% to $72.09 per barrel and Brent was up 1% to $76.83.