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Markets

Stocks hit by China clampdown ahead of earnings-packed week

  • European shares fall, Asian stocks at 2021 lows
  • Bitcoin jumps on short covering, Amazon speculation
  • Govt bond yields post sizeable drop
26 Jul 2021

LONDON: Stock markets fell on Monday as concerns over tighter regulations in China mounted amid caution ahead of a huge week for US 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.

Markets volatile as Asian stocks tumble, bitcoin soars

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 US 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 US 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 US 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.

Auto rally, corporate earnings push European shares to record highs

"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 US 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 US 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.

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.

Brent weakened 35 cents to $73.75 a barrel, while US crude declined 45 cents to $71.62.

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