China Equity Rally Falters, Europe Futures Decline: Markets Wrap

(Bloomberg) — Chinese stocks underperformed the rally that occurred while they were closed for a week, as investors counting on Beijing to produce more stimulus were underwhelmed. A key gauge in Hong Kong plunged the most in 16 years and European futures declined.

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The benchmark CSI 300 opened up 11% then pared gains to 2% after widely anticipated stimulus measures were absent from a press conference in Beijing. The index recouped a bit after. A gauge of Chinese stocks in Hong Kong tumbled the most intraday since 2008 as some investors took profit and rotated to mainland shares. China stocks turnover surged to a record 2.6 trillion yuan ($368 billion).

Broader Asian equities dropped after Wall Street was dragged down by a tech selloff, geopolitical angst and bets on a smaller Federal Reserve rate cut. MSCI’s Asia-Pacific share gauge dropped the most in two months, the Treasury curve steepened and oil fell.

A briefing by China’s National Development and Reform Commission failed to deliver more stimulus measures after policy announcements before the Golden Week holiday break sent shares in China and Hong Kong surging. From JPMorgan Asset Management to HSBC Global Private Banking, numerous investors questioned the sustainability of that rally.

“While the policy tone is still certainly indicating a supportive tone, the limited new measures appear to be disappointing markets for now,” said Lynn Song, Greater China chief economist at ING Bank NV. “Moving forward, the market trend will likely depend on the speed and strength of further policy follow-up from other ministries.”

The S&P 500 fell 1% on Monday after notching a four-week winning run. In the wake of Friday’s solid jobs data, Treasuries continued to drop — with the 10-year yield topping 4%. The Fed is “well positioned” to pull off a soft landing for the economy, New York Fed president John Williams told the Financial Times in an interview.

“Friday’s strong jobs report not only appeared to kill any chance of a 50-basis-point rate cut in November, it kickstarted chatter about the Fed leaving rates unchanged if economic data continues to come in hotter than expected,” said Chris Larkin at E*Trade from Morgan Stanley. “But as last week showed, geopolitics can’t be ignored.”

At the NDRC briefing, Chinese officials said they were confident of reaching economic targets this year and promised further support for growth, although they held back from unleashing more stimulus. They said that China would continue to issue ultra-long sovereign bonds next year to support major projects and invest 100 billion yuan.

“I wouldn’t be surprised if we see bigger volatility around events like the NDRC now, because expectations have been raised,” said Phillip Wool, head of portfolio management at Rayliant Global Advisors. “I do believe policymakers are taking a different tack now, and that’s our focus for the medium- to longer-term.”

There’s some convergence in the markets with investors rotating money from Hong Kong to China, benefiting mainland shares, said Marvin Chen, a Bloomberg Intelligence strategist.

Invesco Ltd. and Nomura Holdings Inc. are also among those viewing the recent rebound with skepticism and waiting for Beijing to back up its stimulus pledges with real money.

An overheating of the A-share market and the Chinese government’s delivery on its recently announced policy stimulus are among the risks investors should watch amid the Chinese stock market rally, according to Morgan Stanley.

The crisis in the Middle East continued to unnerve investors, with fighting escalating Monday on multiple fronts after a year of war. The Israel Defense Forces said it intercepted most of a barrage of rockets fired toward Tel Aviv by Hamas and other Iran-backed groups. Brent crude soared to its highest price since August as speculation increased that Israel may attack Iran’s oil infrastructure. West Texas Intermediate rose early Tuesday.

To Dave Sekera at Morningstar, if there is any further geopolitical escalation, that would potentially spur the risk-off trade — with growth shares underperforming value ones.

“Typically, in a risk-off trade, you’re going to see rotation into defense stocks, but I’d be careful if you’re an investor today,” he said. “Some of the defensive sectors today are already overvalued. Unlike a typical risk-off trade, I think oil stocks would go up.”

Key events this week:

Fed’s Raphael Bostic, Susan Collins, Philip Jefferson and Adriana Kugler speak, Tuesday
Fed minutes, Wednesday
Fed’s Lorie Logan, Raphael Bostic, Austan Goolsbee and Mary Daly speak, Wednesday
US initial jobless claims, CPI, Thursday
Fed’s John Williams and Thomas Barkin speak, Thursday
JPMorgan, Wells Fargo kick off earnings season for the big Wall Street banks, Friday
US PPI, University of Michigan consumer sentiment, Friday
Fed’s Lorie Logan, Austan Goolsbee and Michelle Bowman speak, Friday

Some of the main moves in markets:

Stocks

S&P 500 futures were little changed as of 6:53 a.m. London time
Nasdaq 100 futures fell 0.1%
Futures on the Dow Jones Industrial Average were little changed
The MSCI Asia Pacific Index fell 2.1%
The MSCI Emerging Markets Index fell 2%
Japan’s Topix fell 1.6%
Hong Kong’s Hang Seng fell 8.1%
The Shanghai Composite rose 2.7%
Euro Stoxx 50 futures fell 0.9%

Currencies

The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.0982
The Japanese yen rose 0.2% to 147.92 per dollar
The offshore yuan was little changed at 7.0690 per dollar
The British pound was little changed at $1.3091

Cryptocurrencies

Bitcoin fell 1% to $62,368.2
Ether fell 0.7% to $2,423.87

Bonds

The yield on 10-year Treasuries declined three basis points to 4.00%
Germany’s 10-year yield advanced five basis points to 2.26%
Britain’s 10-year yield advanced eight basis points to 4.21%
Japan’s 10-year yield was little changed at 0.925%
Australia’s 10-year yield advanced nine basis points to 4.17%

Commodities

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Shery Ahn, April Ma, Jason Scott and Qizi Sun.