Key events
Hunter added:
Asian markets were weighed down once more, with China at the eye of the storm. Despite some efforts by the central bank to boost the economy such as Tuesday’s move to cut key policy rates, investors have turned their back until further measures are announced. The high rate of youth unemployment, tepid consumer spending, deflation and weakening trade numbers are all playing their part in keeping the lid on any signs of optimism.
In particular, the beleaguered property sector remains under the spotlight, with the latest show of strain coming from Zhongzhi Enterprise Group, which announced that it was facing a liquidity crisis which would lead to a debt restructuring. The news followed hot on the heels of Zhongrong International Trust having revealed that it had missed several repayments since the end of July.
Meanwhile, the February record highs for the FTSE100 are now a distant memory, with the weight of money seeming to have moved onto pastures new. Indeed, after another weak opening taken from global cues elsewhere, the index is now in negative territory for the year to date, having fallen 1.6%. Further pressure came from the technical outcome of a number of heavyweight stocks being marked ex-dividend, such as GlaxoSmithKline, Imperial Brands and the London Stock Exchange Group.
Here in London, the FTSE 100 index has lost 36 points to 7,321, a 0.5% drop. European indices are also in the red.
Richard Hunter, head of markets at interactive investor, said:
Investors moved onto the back foot with inflation clearly remaining in play, forcing them to consider whether the rate hiking programme is over after all.
Minutes from the latest Federal Reserve meeting weighed on US markets, with the potential for further rate hikes still on the table. The Fed noted that inflation was still well above target and the labour market still tight, with most members seeing significant upside risks to inflation. In addition, with growth risks to the downside and inflation risks to the upside, the delicate balance between taming inflation and avoiding recession remain a live issue.
Other economic data has supported the resilience of the US economy, with strong hiring and retail sales numbers showing that the consumer is still alive and well, while the recent GDP number also pointed to a robust foundation. While the consensus continues to point to no change at the September meeting, the odds are rising for a further hike in November. Such uncertainty has led some investors to reconsider whether the fact that markets had been pricing in victory against inflation came too early, and in any event whether higher rates could remain in place for longer than had been anticipated.
He said technology stocks are seen as particularly vulnerable to higher interest rates and so the Nasdaq and also the S&P 500 have born the brunet of a wave of selling, although they are up 29% and 15% in the year so far, while the Dow Jones has added 5%.
Duncan Wrigley, chief China+ economist at Pantheon Macroeconomics has sent us his thoughts on the drop in Japanese exports last month, the first in about two years.
Demand is unlikely to pick up until the global economy rebounds or innovation convinces people of the need to buy new gadgets and upgrade existing ones.
The Bank of Japan is likely to view the July export figures as the continuation of a gentle downward decline this year. The second quarter’s 0.7% q/q GDP growth was driven by inbound tourism and falling import prices, while goods exports were weak and domestic demand fell.
This uneven picture seems to be intact as we enter the second half, while inflation is cooling more slowly than the Bank projected. Tomorrow’s national consumer prices index probably will be unchanged at 3.2% y/y in July, propped up by the lagged effect of last year’s import cost surges. We think the Bank will focus on the soggy domestic economy and falling real wages in sticking to the negative policy rate, at -0.1%, to support the economy in the second half.
BAE Systems to buy US space firm for $5.6bn in one of UK’s biggest takeovers this year
Britain’s biggest weapons company BAE Systems has agreed to buy US space technology company Ball Aerospace for $5.6bn (£4.4bn), in one of the biggest takeovers involving a UK company this year.
The move comes amid a surge in government spending on global military and spying technology prompted by Russia’s invasion of Ukraine in February last year.
BAE chief executive Charles Woodburn said:
The strategic and financial rationale is compelling, as we continue to focus on areas of high priority defence and intelligence spending.
Colorado-based Ball Aerospace, a subsidiary of Ball Corporation, designs makes instruments, sensors and spacecraft, including satellite technologies. Its parent company makes beer cans.
Foreign investors have been dumping Chinese stocks and bonds after losing confidence in Beijing’s promises of more measures to shore up the faltering economy.
Financial Times calculations based on data from Hong Kong’s Stock Connect trading scheme show that investors have almost completely reversed Rmb54bn ($7.4bn) in net purchases of Chinese equities that followed a pledge on 24 July from the politburo of top Communist party leaders to increase policy support.
Bondholdings of foreign institutional investors fell by Rmb37bn in July to Rmb3.24tn, according to figures released by China’s foreign exchange regulator yesterday, the FT said.
Introduction: China slowdown fears rattle markets; rouble weakens amid talk of capital controls
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Shares across Asian markets are down, following Wall Street lower, after minutes from the US Federal Reserve’s last meeting indicated America’s central bank may keep interest rates higher for longer to fight inflation. Japan’s Nikkei fell 0.4% while Hong’s Kong’s Hang Seng slipped 0.2%, paring earlier losses.
The minutes from July’s meeting, when rates rose their highest level in 22 years, cited “significant upside risks to inflation, which could require further tightening of monetary policy.”
The prospect of higher borrowing costs for a longer period pushed yields, or interest rates, on 10-year US government bonds to their highest level sine 2008 in New York.
Concerns about slowing growth in China are also weighing on markets.
Japan’s exports fell in July for the first time since February 2021, dragged down by lower demand from China for computer chips and cars. Exports dropped 0.3% year on year, while shipments to China were down 13.4%.
Russia’s rouble has weakened again against the dollar after plummeting on Monday. The Russian central bank stepped in with an interest rate hike to 12% the following day to stem the slide past the 100 threshold, but analysts say more measures are needed to return the currency to the 80-90 range preferred by the authorities.
At the moment, the rouble is trading at 95.1 per dollar, down 0.5%, after briefly falling to close to 102 on Monday, the lowest since March 2022.
There has been speculation that capital controls could be reintroduced to help prop up the struggling currency.
Citing a Russian finance ministry proposal, the Financial Times reported yesterday that large exporters could be forced to convert up to 80% of their foreign currency into roubles in order to raise demand for the currency.
Other proposals included a ban on foreign dividend payments and loan extensions, cancelling import subsidies, limiting currency swaps, and reducing the amount of foreign currency exporters can take out of Russia.
The Agenda
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9am BST: Norges Bank interest rate decision (forecast: rise to 4% from 3.75%)
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10am BST: Eurozone trade for June
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1.30pm BST: US Initial jobless claims for week of 12 August (forecast: 240,000)
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3pm BST: US Conference Board Leading Index for July
