China fears and higher yields hurts stocks
A combination of fears that China is cooling, and rising government yields have prompted traders to sell stocks. China has enjoyed an impressive economic rebound, but lately there have been some concerns the country’s recovery is running out of steam. Goldman Sachs lowered its growth forecast for China from 8.2% to 7.8%. Nomura also reduced its GDP guidance for the country. The downgrades have soured sentiment in the markets. China is the second largest economy in the world, so if its recovery comes off the boil, the ripple out effect is likely to be felt around globe. Looking further down the line, if China’s rebound loses momentum, it is possible that other countries might be in for a similar situation.
Yesterday, the US 10-year yield hit 1.5%, its highest mark since June. The upward move was driven by the Federal Reserve’s remarks last week, as the bank indicated it might begin tapering its bond buying scheme soon. Today, the US 10-year hit 1.54% as it seems the bond market is beginning to factor-in a tightening of monetary policy. Until a few weeks ago, US stocks were enjoying an extremely bullish run, which was partly due to the ultra-loose policy of the Fed, but now some of those gains are being handed back as the major indices are in the red. Broadly speaking, the tech sector is relatively more indebted, so it has arguably more to lose should rates rise, hence why the NASDAQ 100 is -2.4%.
The US dollar has been dragged higher by the rise in yields. Dealers are snapping up the US dollar as the prospect of the Fed curtailing its stimulus package in the months ahead has made the currency more attractive. At the Jackson Hole Symposium last month, the Fed didn’t take the opportunity to map out a path to tapering the bond buying package, but there is chatter the announcement could be made in the next few months. The British pound has been hit by the risk off mood in the markets and the fears about fuel shortages are not helping sterling either. GBP/USD has dropped to an eight month low.
Gold is under pressure again as the strong greenback has pushed it to its lowest mark since mid-August, when the asset experienced a lot of volatility due to speculation about tapering, and it now seems those fears have re-emerged. WTI and Brent crude have retreated a little from the near three year highs that were posted recently.