Asian equities fell sharply on Wednesday, led by Chinese stocks after a slew of data pointed to a patchy recovery in the world's second-biggest economy, while the dollar was near a one-month high as traders dialled back bets of early interest rate cuts.
MSCI's broadest index of Asia-Pacific shares outside Japan slid 1.8%, touching a fresh one-month low and on course for its steepest one-day percentage fall in over five months.
European stocks were set for a sharply lower open, with the Eurostoxx 50 futures down 0.67%, German DAX futures down 0.55% and FTSE futures 0.71% lower.
Investor focus during European hours will be on inflation data from Britain and euro zone that could influence the outlook for the central banks' monetary policies.
Markets are pricing in 144 basis points (bps) of interest rate cuts from the European Central Bank and 123 bps of easing from the Bank of England this year.
In Asia, China stocks fell sharply after data showed China's economy grew 5.2% in the fourth quarter from a year earlier, missing analysts' expectations slightly but still ensuring Beijing met its annual growth target of around 5%.
Analysts said December indicators released along with the GDP data were more worrying, suggesting the country's protracted property crisis is deepening while retail sales growth slowed and investment remained tepid. Only industrial output showed some signs of improvement.
"The series of China's economic data releases today seem to reflect more of the same an uneven growth environment, which does not offer much conviction of a sustained turnaround just yet," said Jun Rong Yeap, a market strategist at IG in Singapore.
"The trend of weak economic data suggests that the accommodative policy environment has yet to translate to a sustained turnaround in economic conditions, which may amplify call for more supportive intervention by authorities in first half of 2024."
China's blue-chip stock index slipped 1%, hovering near the lowest level since early 2019. The index is down 5% in January after shedding 11% last year. Hong Kong's Hang Seng index slumped 3% to its lowest since November 2022.
"I think the market reaction is too aggressive, and is probably more of a reflection of just how weak sentiment is right now," said Ben Bennett, APAC investment strategist for Legal and General Investment Management.
Investor enthusiasm was also dampened by the hawkish rhetoric from central bank officials, pushing back against expectations of early rate cuts.
U.S. Federal Reserve Governor Christopher Waller said on Tuesday that while inflation was approaching the central bank's 2% goal, the Fed should not rush to lower interest rates until lower inflation can clearly be sustained.
Waller's comments echoed sentiments of European central bankers.
Markets are pricing in a 65% chance of a rate cut by the Fed in March, according to the CME FedWatch tool, compared with the 81% likelihood at the start of the week. They are also pricing in 153 bps of cuts this year, more than double the amount of easing Fed projected in December.
Vasu Menon, managing director of investment strategy at OCBC Bank in Singapore, said the biggest short-term risk to the market is the disconnect between what the market is expecting and what might actually happen.
"The reality is that the markets are coming to terms with the fact that may be they have gone into overdrive in terms of rate cuts (pricing)."
Geopolitical worries have also sapped sentiment as investors keep an eye on developments in the Red Sea, Gaza and Ukraine.
In currency markets, the dollar index, which measures the U.S. currency against six rivals, rose 0.174% and touched a fresh one-month high of 103.51.
The Japanese yen weakened 0.31% to 147.64 per dollar, while euro last fetched $1.0862. Sterling eased 0.2% to $1.26105. [FRX/]
In commodities, oil prices fell on the China data. U.S. crude fell 0.69% to $71.90 per barrel and Brent was at $77.81, down 0.61% on the day. [O/R]
Spot gold dropped 0.5% to $2,018.09 an ounce after dropping 1% in the previous session on the stronger dollar.
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