SYDNEY – Asian shares continued to decline on Monday, showing little reaction to an unexpected rate cut by China’s central bank, while Wall Street futures firmed following President Joe Biden’s decision to withdraw from the election race.
The People’s Bank of China reduced short-term rates by 10 basis points, leading to a decrease in long-term borrowing costs and bond yields. This decision followed the release of a policy document by Beijing on Sunday, outlining its economic ambitions.
Investors were not significantly impressed by the move, interpreting it as an indication of the economy’s weakness. Consequently, Chinese blue-chip stocks fell by 0.9%, along with the yuan.
“Fundamentally, all indicators suggest that China needs a lower rate environment, especially with high real rates in this disinflationary period,” said Gary Ng, Asia-Pacific senior economist at Natixis in Hong Kong. “The general trend aligns with the fact that the economy is struggling, and there seems to be an urgency from authorities to stimulate it.”
MSCI’s broadest index of Asia-Pacific shares outside Japan declined by another 0.7%, following a 3% drop last week. Japan’s Nikkei decreased by 1.2%, South Korea’s benchmark index fell by 1.3%, and Taiwan experienced a 2.3% loss amid concerns about U.S. restrictions on chip sales.
Investors appeared more prepared for news of President Biden’s decision to exit the election race and endorse Vice President Kamala Harris for the Democratic ticket.
Online betting site PredictIT showed a drop in the probability of a Donald Trump victory, with his price falling 4 cents to 60 cents, while Harris’ probability increased by 12 cents to 39 cents. California Governor Gavin Newsom, another potential Democratic contender, trailed at 4 cents.
Markets responded positively to the news, with S&P 500 stock futures edging up 0.1% and Nasdaq futures rising 0.2%. Futures for 10-year Treasuries gained 2 ticks, and 10-year bond yields dipped by 2 basis points to 4.22%.
EUROSTOXX 50 futures rose by 0.5%, while FTSE futures increased by 0.4%.
“As Trump’s polling results have improved, markets have leaned towards positions that anticipate more trade barriers and potential inflation,” analysts at ANZ said. “Some polls show Harris performing better than Biden against Trump, and the Democrats will be hoping for a Harris-driven boost in the upcoming polls.”
A busy week of corporate earnings is ahead, with Tesla and Google-parent Alphabet kicking off the season for the “Magnificent Seven” megacap group of stocks. Other companies reporting include General Electric, General Motors, Ford, and Lockheed Martin.
The tech sector is expected to report a 17% year-over-year increase in earnings, while the communication services sector is projected to see a 22% rise. These gains are expected to surpass the 11% estimated rise for the S&P 500 overall, according to LSEG IBES.
Europe’s largest banks are also set to report this week, with attention on whether gains from higher interest rates have plateaued and if recent political issues are affecting sentiment.
The week’s economic news will culminate with the Federal Reserve’s favored inflation measure, the core personal consumption expenditures index, set for release on Friday. It is expected to show a 0.1% rise in June, bringing the annual rate down slightly to 2.5%.
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