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Investors dump Chinese stocks, bonds amid global recession fears

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Foreign investors continued to cut holdings in Chinese bonds in July and dumped equities for the first time in four months, according to a report by the Institute of International Finance (IIF).

Emerging markets (EM) posted a fifth straight month of portfolio outflows, setting the longest such streak in records going back to 2005, as global recession risk, inflation and a strong dollar drew away cash, the report released on Wednesday showed.

Chinese debt witnessed outflows of about $3bn last month, while $6bn exited other EM, IIF estimated.

If confirmed by official data, it would be the sixth consecutive month of foreign outflows from China’s $20 trillion bond market.

During the same period, China’s stock market witnessed $3.5bn of foreign outflows, compared with marginal inflows of $2.5bn in other EM, the global financial services trade group added.

The benchmark CSI 300 Index dropped 7 percent, down every week in July, as domestic COVID-19 flare-ups, property woes and global recession risks weighed on the market.

“China’s A-shares saw a range-bound, generally weaker trend since July under both domestic and overseas influences,” China International Capital Corporation (CICC) said in a note.

Data showed the world’s second-largest economy slowed sharply in the second quarter, missing market expectations with only a 0.4 percent increase from a year earlier.

With the fallout of the Ukraine war continuing, Sino-US tensions over Taiwan mounted as US House of Representatives Speaker Nancy Pelosi visited the self-ruled island claimed by Beijing.

“For the coming months, several factors will influence flows dynamics, among these the timing of inflation peaking and the outlook for the Chinese economy will be in focus,” IIF said.

Overseas investors have been reducing holdings of Chinese bonds since February, as diverging monetary policies kept Chinese yields pinned below their US counterparts.

The People’s Bank of China has been easing policy to aid a COVID-hit economy, while the US Federal Reserve has been hiking rates to fight soaring inflation

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BUSINESS

European stocks set to climb as traders assess earnings, economic data

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European markets are set to advance cautiously on Monday as investors continue to monitor corporate earnings and key economic data points, assessing the risk of recession.

Britain’s FTSE 100 is seen around 19 points higher at 7,459, Germany’s DAX is expected to gain around 54 points to 13,628 and France’s CAC 40 is set to add around 21 points to 6,493.

The pan-European Stoxx 600 index closed Friday’s session down around 0.8% after an unexpectedly strong U.S. jobs report lowered expectations for a recession, and in turn increased the likelihood of the Federal Reserve tightening monetary policy more aggressively to bring down inflation.

Markets in Asia-Pacific were mixed overnight, with Hong Kong’s tech-heavy Hang Seng index weighing down the region.

U.S. stock futures were flat after the S&P 500 closed out a third straight positive week, with investors turning their attention to a key inflation report on Wednesday.

On the data front in Europe, August’s Sentix economic sentiment index for the euro zone is due Monday morning.

Corporate earnings continue to drive individual share price movement in Europe, with Siemens Energy, Porsche and BioNTech among the companies reporting before the bell on Monday.

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Stocks fall after strong July jobs report points to more Fed action

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Stocks fell Friday in a volatile trading session after the July jobs report was much better than expected, as investors assessed what a strong labor market would mean for the Federal Reserve’s rate tightening campaign.

The Dow Jones Industrial Average shed 96 points or 0.29%.The S&P 500 fell 0.67% and the Nasdaq Composite was down 1.01%. Losses were offset by bank stocks, which rose on hopes that interest rate hikes will continue at a solid clip. Energy stocks also gained, but technology companies slumped.

The labor market added 528,000 jobs in July, easily beating a Dow Jones estimate of a 258,000 increase. The unemployment rate ticked down to 3.5%, below the 3.6% estimate. Wage growth also rose more than estimated, up 0.5% for the month and 5.2% higher than a year ago, signaling that high inflation is likely still a problem.

Stocks opened lower following the report, even as it seemed to indicate the economy was not currently in a recession. Job growth was expected to slow as the Fed continues to hike interest rates to tame inflation, but this report shows a labor market still running hot. That means the central bank may act more aggressively at its next meeting.

“Anybody that jumped on the ‘Fed is going to pivot next year and start cutting rates’ is going to have to get off at the next station, because that’s not in the cards,” said Art Hogan, chief market strategist at B. Riley Financial. “It is clearly a situation where the economy is not screeching or heading into a recession here and now.”

The report is a crucial one as it’s one of two the central bank will see before it decides how much to raise rates at its September meeting. The Fed will have another jobs report and two more consumer price index numbers to weigh before it makes its next rate decision.

Major averages posted their best month since 2020 in July on the hope the Fed would slow the pace of its hikes. The S&P 500 added 9.1% last month.

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Bank of England tipped for biggest interest rate hike in 27 years as inflation soars

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The Bank of England on Thursday is broadly expected to hike interest rates by 50 basis points, its largest single increase since 1995.

Such a move would take borrowing costs to 1.75% as the central bank battles soaring inflation and would be the first half-point hike since it was made independent from the British government in 1997.

U.K. inflation hit a new 40-year high of 9.4% in June as food and energy prices continued to surge, deepening the country’s historic cost-of-living crisis.

Bank of England Governor Andrew Bailey suggested in a hawkish speech on July 19 that the Monetary Policy Committee could consider a 50 basis point hike, vowing that there would be “no ifs or buts” in the Bank’s commitment to returning inflation to its 2% target.

A Reuters poll taken over the past week indicated that over 70% of market participants now anticipate a half-point rise.

James Smith, developed markets economist at ING, said that although the economic data since June’s 25 basis point hike had not moved the needle significantly, the MPC’s prior commitment to act “forcefully” to bring inflation down, and the market more-or-less pricing in 50 basis points at this stage, means policymakers are likely to err on the aggressive side.

“Even so, the window for further rate hikes feels like it’s closing. Markets have already pared back expectations for ‘peak’ Bank Rate from 3.5% to 2.9%, though that still implies two further 50bp rate hikes by December, plus a little more thereafter,” Smith said.

“That still feels like a stretch. We’ve been penciling in a peak for Bank Rate at 2% (1.25% currently), which would mean just one more 25bp rate hike in September before policymakers stop tightening.”

He acknowledged that, in practice, this might be an underestimate, and depending on the signal the Bank sends on Thursday, ING wouldn’t rule out an additional 25bps or at most 50ps worth of hikes beyond that.

Smith said the key points to watch out for in Thursday’s report would be whether the Bank continues to use the word “forcefully,” and its forecasts, which plug market expectations into the Bank’s models and expected policy trajectory.

Should the forecasts indicate, as in previous iterations, an acceleration of unemployment and inflation well below target in two to three years’ time, markets could deduce a more dovish message.

“Everybody takes that as a sign of them saying ‘okay, well if we were to follow through with what markets are expecting, then inflation is going to be below target,’ which is their very indirect way of saying ‘we don’t need to hike as aggressively as markets expect,’” Smith told CNBC on Tuesday.

“I think that will be repeated, I would expect, and that should be taken as a bit of a sign maybe that we’re nearing the end of the tightening cycle.”

Growth worries
A more aggressive approach at Thursday’s meeting would bring the Bank’s monetary tightening trajectory closer to the trend set by the U.S. Federal Reserve and the European Central Bank, which implemented 75 and 50 basis point hikes last month, respectively.

But while it may fortify the Bank’s inflation-fighting credibility, the faster pace of tightening will exacerbate downside risks to the already-slowing economy.

Berenberg Senior Economist Kallum Pickering said in a note Monday that Governor Bailey will likely carry a majority of the nine-member MPC if he backs a 50 basis point hike on Thursday, and projected that with inflation likely still rising¸ the Bank will hike by another 50bp in September.

“Thereafter, the outlook is uncertain. Inflation will likely peak in October when the household energy price cap increases again. Amid growing evidence that tighter monetary conditions are weighing on demand and underlying inflation, we expect the BoE to hike by a further 25bp in November but pause in December,” Pickering said.

Berenberg expects the bank rate to reach 2.5% in November, up from 1.25% at present, though Pickering said the risks to this call are tilted to the upside. He suggested the BOE should be able to reverse some of the tightening during 2023 as inflation begins to roll over, and will likely cut the bank rate by 50 basis points next year with a further 50bp reduction in 2024.

Energy price cap rise
Britain’s energy regulator Ofgem increased the energy price cap by 54% from April to accommodate soaring global costs, but is expected to rise by a greater degree in October, with annual household energy bills predicted to surpass £3,600 ($4,396).

Barclays has historically been cautious on bank rates, placing a lot of faith in the MPC’s “early and gradual” strategy. However, Chief U.K. Economist Fabrice Montagne told CNBC in an email last week that there is now a case for policymakers to act “forcefully” as energy prices continue to spiral.

“In particular, surging energy prices are feeding into our forecast of the Ofgem price cap and will force the BoE to revise up its inflation forecast yet again. Higher inflation for even longer is the kind of scenario that spooks central banks because of higher risks of persistence and spillovers,” he said.

The British banking giant now expects a 50 basis point hike on Tuesday followed by 25 basis points in September and then “status quo” at 2%.

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