World shares take China knock, oil sags on supply question

LONDON (Reuters) – Global stocks fell on Thursday, tracking a slump in Asia in response to a widening crackdown on the tech sector in China and concern over the strength of the country’s economic recovery, while oil prices sagged on supply uncertainty.

The pace of economic recovery from the COVID-19 pandemic and its impact on inflation and central bank policymaking continues to drive markets, with the U.S. Federal Reserve overnight signalling no immediate plans to tighten monetary policy.

The European Central Bank, meanwhile, announced the results of a strategy review in which it said it would set a new inflation target of 2%, compared with its previous target of “below but close to 2%”.

The MSCI’s leading index of global stocks was down 0.5%, extending early session losses and tracking a 1.7% decline in the equivalent index of Asia shares outside Japan to its lowest level since mid-May.

That had been fuelled by China’s move to rein in its tech giants, with the most recent being U.S.-listed Didi, which was ordered to pull its app from stores.

Despite its drop, the global index remains in a broad trading range established since late June and just off its record high. The STOXX Europe 600, a broad gauge of Europe’s biggest companies, meanwhile, was down 1.8%.

U.S. stock futures pointed to a lower open on Wall Street, down around 1.3%-1.4%.

“We believe valuations to be frothy not just in India but in different geographies across the world,” Nikhil Kamath, Co-Founder and CIO at asset manager True Beacon, said. “We are hedged as much as 55% today, our net exposure to the market is only about 45%.”

THREAT TO RECOVERY

In tandem with the tech crackdown, guidance toward rate cuts from Chinese policymakers has also spooked some investors by highlighting softness in China’s economy – weak loan growth and slow demand – which threatens the pace of the global recovery.

The Chinese cabinet said on Wednesday that policymakers will use timely cuts in the bank reserve requirement ratio (RRR) to support the real economy, especially small firms.

The yield on 10-year Chinese sovereign debt posted its sharpest fall in nearly a year on Thursday, dropping to 2.998%, the lowest since August.

Global bonds more broadly rallied, with the U.S. 10-year yield down around 7 basis points and the German 10-year yield down 3 basis points, extending price moves seen earlier in the week and leading to a “serious debate” about their cause, said Deutsche Bank analyst Jim Reid.

Some consider the move a sign the market is re-pricing the potential for the economy to be hit by secular stagnation after the pandemic, while others point to technical drivers including reduced supply from the Fed and higher demand to buy.

Mark Haefele, Chief Investment Officer, UBS Global Wealth Management, said despite the dip in U.S. yields, the Swiss adviser to many of the world’s super-rich expected the benchmark to bounce back.

“With the expectation of a taper announcement from the Fed over the next few months, robust economic growth driving continued strength of nonfarm payrolls, and further [post-pandemic economic] reopening, we expect the 10-year yield to reach 2% by the end of the year.”

In currency markets, the dollar edged lower against a basket of major peers, down 0.3%. Cryptocurrencies were sold on negative comments from Chinese policymakers and bitcoin fell to a more than one-week low.

Oil was under pressure, as a wave of new viral infections sweeps Asia and the world that could curb demand, while traders anticipate a possible rise in supply after the collapse of talks among producers. [O/R]

Brent futures were last down 1.1% at $72.65 a barrel while U.S. crude fell 1.3%.

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