Stock markets fell on Monday as concerns over tighter regulations in China mounted amid caution ahead of a huge week for US corporate earnings and the Federal Reserve meeting.
The key event of the week for markets is the Fed meeting, where investors will look for Chair Jerome Powell’s comments about the timing for the start of tapering of the central bank’s asset purchases.
This week also sees more than one-third of S&P 500 companies report quarterly results including Facebook Inc, Tesla Inc, Apple Inc, Alphabet Inc, Microsoft Corp and Amazon.com.
Forecast-beating earnings have helped fuel this year’s stock rally but the question is whether it can last or if the optimism has been priced in.
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 2.1% to its lowest since December.
Wall Street looked set to open lower but remained near record highs.
Elsewhere, bitcoin jumped as much as 12.5 percent to its highest since mid-June on hopes of growing acceptance of the cryptocurrency including from Amazon and as short sellers covered their positions.
The world’s biggest cryptocurrency was last up 7.5 percent at $38,076 while ether was 6 percent higher at $2,324.
"While we see the Fed as being more hawkish this week, it is only one of several speed bumps ahead in what is an environment supportive for risk,” said Sebastien Galy, a strategist at Nordea.
"The current profit taking induced in part by pressure on China’s Tech is unlikely to last long as US stocks should again be bought on the dip.”
Weighing on sentiment on Monday, however, was China. Chinese blue chips shed 4.4 percent to their lowest since December, in what was also the biggest daily decline in more than a year, as the education and property sectors were routed on worries over tighter government rules.
Investors have been pulling money out of Asian and emerging market stocks and adding to their US holdings, supported by forecast-beating earnings – with just over one-fifth of the S&P 500 having reported, 88 percent of firms have beaten the consensus of analysts’ expectations.
Oliver Jones, a senior markets economist at Capital Economics, noted US earnings were projected to be roughly 50 percent higher in 2023 than they were in the year immediately prior to the pandemic, significantly more than was anticipated in most other major economies.
"With so much optimism baked in, it seems likely to us that the tailwind of rising earnings forecasts, which provided so much support to the stock market over the past year, will fade,” he cautioned.
The week is also packed with US data. Second-quarter gross domestic product is forecast to show annualised growth of 8.6 percent, while the Fed’s favoured measure of core inflation is seen rising an annual 3.7 percent in June.
BOND YIELDS FALL
Bond markets have remained remarkably untroubled by the prospect of eventual tapering. Yields on US 10-year notes have fallen for four weeks in a row – they slipped another 6 basis points to 1.229 percent on Monday.
The drop has done little to undermine the dollar, in part because European yields have fallen even further amid expectations of continued massive bond buying by the European Central Bank.
German benchmark 10-year yields fell 3 basis points on Monday to a 5-1/2 month low of -0.442 percent.
Chris Scicluna, head of economic research at Daiwa Capital markets, said yields were falling because of geopolitical worries and tighter Chinese regulations.
”These developments compound fears about the medium-term outlook for global growth, which is one of the factors that has been pushing yields down,” he said.
Investors have also reversed their long-standing dollar short position, data shows, with the dollar index near four-month highs.
The euro was unchanged on Monday, hovering around $1.1773 but not far from its 2021 low of $1.1704.
Oil prices have been buoyed by wagers that demand will remain strong as the global economy gradually opens and supply stays tight, but they fell on Monday. O/R
Brent weakened $1.32 to $72.78 a barrel, while US crude declined $1.47 to $70.6.
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