Stocks hit by China clampdown ahead of earnings-packed week
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[July 26, 2021] By
Tommy Wilkes
LONDON (Reuters) - Stock markets fell on
Monday as concerns over tighter regulations in China mounted amid
caution ahead of a huge week for U.S. corporate earnings and a Federal
Reserve meeting.
The key event of the week for markets is the Fed meeting, where
investors will look for Chair Jerome Powell's comments about the timing
for the start of tapering of the central bank's asset purchases.
This week also sees more than one-third of S&P 500 companies report
quarterly results including Facebook Inc, Tesla Inc, Apple Inc, Alphabet
Inc, Microsoft Corp and Amazon.com.
Forecast-beating earnings have helped fuel this year's stock rally, but
the question is whether it can last or if the optimism has been priced
in.
By 1100 GMT, the EURO Stoxx 50 was 0.44% lower, the German DAX 0.45%
weaker and Britain's FTSE 100 down 0.29%.
MSCI's broadest index of Asia-Pacific shares outside Japan closed down
2.1% to its lowest since December.
Wall Street was set to open lower, but remained just half a percent off
record highs.
Elsewhere, bitcoin jumped to its highest since mid-June on hopes of
growing acceptance of the cryptocurrency, including speculation Amazon
might accept it as payment. Short sellers covering their positions added
to the rally.
The world's biggest cryptocurrency was last up 9.2% at $38,690 while
ether was 7.2% higher at $2,352.
"While we see the Fed as being more hawkish this week, it is only one of
several speed bumps ahead in what is an environment supportive for
risk," said Sebastien Galy, a strategist at Nordea.
"The current profit-taking induced in part by pressure on China's Tech
is unlikely to last long as U.S. stocks should again be bought on the
dip."
Weighing on sentiment on Monday, however, was China. Chinese blue chips
shed 3.2% in the biggest daily decline since March, as the education and
property sectors were routed because of worries over tighter government
rules.
Investors have been pulling money out of Asian and emerging market
stocks and adding to their U.S. holdings, supported by forecast-beating
earnings - with just over one-fifth of the S&P 500 having reported, 88%
of firms have beaten the consensus of analysts' expectations.
Oliver Jones, a senior markets economist at Capital Economics, noted
U.S. earnings were projected to be roughly 50% higher in 2023 than they
were in the year immediately prior to the pandemic, significantly more
than was anticipated in most other major economies.
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The German share price
index DAX graph is pictured at the stock exchange in Frankfurt,
Germany, July 23, 2021. REUTERS/Staff
"With so much optimism baked in, it seems likely to us that the tailwind of
rising earnings forecasts, which provided so much support to the stock market
over the past year, will fade," he cautioned.
The week is also packed with U.S. data. Second-quarter gross domestic product is
forecast to show annualised growth of 8.6%, while the Fed's favoured measure of
core inflation is seen rising an annual 3.7% in June.
BOND YIELDS FALL
Bond markets have remained remarkably untroubled by the prospect of eventual
tapering. Yields on U.S. 10-year notes have fallen for four weeks in a row -
they slipped another 4 basis points to 1.241% on Monday.
The drop has done little to undermine the dollar, in part because European
yields have fallen even further amid expectations of continued massive
bond-buying by the European Central Bank.
German benchmark 10-year yields fell more than 3 basis points on Monday to a
5-1/2 month low of -0.449% before recovering slightly.
Graphic: Germany's Bund yield at 5-1/2 month low:
https://fingfx.thomsonreuters.com/
gfx/mkt/myvmnmkmjpr/DE2607.png
Chris Scicluna, head of economic research at Daiwa Capital markets, said yields
were falling because of geopolitical worries and tighter Chinese regulations.
"These developments compound fears about the medium-term outlook for global
growth, which is one of the factors that has been pushing yields down," he said.
Investors have also reversed their long-standing dollar short position, data
shows, with the dollar index near four-month highs but dipping on Monday to
92.718.
The euro recovered slightly, gaining 0.2% to $1.1794, though it remained not far
from its 2021 low of $1.1704.
Oil prices have been buoyed by wagers that demand will remain strong as the
global economy gradually opens and supply stays tight, but they fell on Monday.
[O/R]
Brent weakened 35 cents to $73.75 a barrel, while U.S. crude declined 45 cents
to $71.62.
(Additional reporting by Wayne Cole in Sydney and Dhara Ranasinghe in London;
Editing by Nick Macfie and Alex Richardson)
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