Investors worldwide witnessed a significant downturn in Asian and European stocks on Monday, fueled by concerns over the absence of a stimulus plan to revive China's economy and the anticipation of upcoming interest rate decisions. Despite a robust performance in the previous week, which was partly driven by expectations of economic measures from Beijing and two interest rate cuts, market sentiment faltered due to the lack of new policy announcements on Monday. The closure of US markets for a public holiday further exacerbated the impact, with London, Frankfurt, and Paris experiencing declines of 0.7 percent, 1 percent, and 1 percent respectively.
Craig Erlam, an analyst at OANDA, acknowledged the weight of the US bank holiday on trading volumes, emphasizing that the focus this week would be on UK inflation and the Bank of England's (BoE) decisions. Inflation remains stubborn across various economies, and any signs of progress, particularly in the UK where it is proving most persistent, could provide a boost on a wider scale. However, Erlam cautioned that out of all the major economies striving to control inflation while achieving a soft landing, the UK appears to have the least likelihood of success.
Russ Mould, the investment director at AJ Bell, highlighted the continuing concerns surrounding China's recovery, particularly following the lifting of Covid restrictions. He cited uncertainty regarding the measures the Chinese authorities might implement to reinvigorate economic growth, further dampening market confidence. Additionally, worries about energy demand from China, a crucial consumer of crude oil, caused oil prices to stumble.
On a positive note, hopes for improved China-US relations were bolstered as US Secretary of State Antony Blinken engaged in meetings with President Xi Jinping and top envoy Wang Yi in Beijing, raising expectations for a thaw in the relationship between the two nations.
The upcoming interest rate decisions in Britain, Norway, and Switzerland scheduled for Thursday have kept traders on edge. Following a pause in the US and an increase in eurozone rates last week, the Bank of England is widely expected to raise its key interest rate for the 13th consecutive time, as it grapples with high inflation. The size of the hike is a source of anxiety, especially with UK inflation data due on Wednesday. In a striking development, Britain's two-year bond yield surpassed five percent on Monday, a level last seen during the 2008 global financial crisis.
The market also expressed unease over commercial banks' decision to increase interest rates on home loan products in anticipation of further BoE hikes. This move poses a threat to consumer spending and exacerbates the existing cost-of-living crisis in the UK. Michael Hewson, chief market analyst at CMC Markets UK Europe, warned that higher rates were already impacting commercial real estate and house builders by driving up borrowing costs across the board.
Susannah Streeter, head of money and markets at stockbroker Hargreaves Lansdown, remarked that the current market reaction could potentially fulfill the BoE's objectives, as mortgage deals have already surged in anticipation of the bank's decisions, thereby siphoning more demand out of the economy.
Last week, the European Central Bank raised eurozone borrowing costs to a 22-year peak to combat inflation, while the US Federal Reserve decided to pause, and the Bank of Japan maintained its ultra-loose monetary policy. Investors will be closely monitoring Federal Reserve Chairman Jerome Powell's twice-yearly testimony to Congress this week, hoping for insights into the policy board's thinking.
