China Stocks Get a Reality Check; Europe trembles

A look at the day ahead in European and global markets from Tom Westbrook

Gravity brought China’s booming stock market back down to earth with a thud on Wednesday. Disappointment over the lack – so far – of follow-through on stimulus promises sparked a pullback in a spectacular rally and could be a harbinger of further weakness in trading in China-exposed assets in London and Europe.

At the time of writing, the Shanghai Composite was down more than 5% and headed for its biggest decline since the February 2020 pandemic crash.

A jump in Hong Kong was quickly eliminated. Metals and other commodities were down along with China’s proxies such as the Australian dollar. (.HK)(MET/L)(AUD/)

China watchers say yesterday’s National Development and Reform Commission press conference will never be the forum for a substantial policy announcement.

“Please be more patient,” HSBC economist Jing Liu said in a note, noting that we have yet to hear from the State Council or the Ministry of Finance on the specifics of the stimulus.

But clearly the opportunity to secure the markets has been missed and the rally is unlikely to be sustainable until the authorities show investors the money and plenty.

Volatility in China had already dragged down European miners and luxury stocks on Tuesday, but further declines in the iron ore price and a sell-off in Rio Tinto and BHP shares in Sydney suggested more pressure ahead. (.AX)(.L)(.EU)

Elsewhere, the New Zealand dollar fell above its 200-day moving average as the central bank cut interest rates by 50 basis points and left the door open for further cuts – just as markets cut expectations for reducing US rates.

Indian government bonds rose after FTSE Russell said they would be included in its emerging markets index. South Korean government bonds were added to the FTSE World Government Bond Index (WGBI) but were not traded due to a public holiday.

Minutes for the Federal Reserve’s September meeting are due later in the session, though they may not add much as Fed officials have been out in force in recent days, stressing that last week’s strong jobs reading is positive for the economy.

Key developments that could influence markets on Wednesday:

– German commercial data

– The minutes of the Federal Reserve from September

(Edited by Muralikumar Anantharaman)