Global markets faced turbulent times this week, with Hong Kong’s Hang Seng index plunging into bear market territory, down 2.1% for the day and nearly 21% from its January peak. The pan-European Stoxx 600 index followed suit, dropping 1% for the day and over 3% for the week. U.S. stock futures indicated a lower opening for Wall Street, as fears of a Chinese economic slowdown and persistent high U.S. interest rates rocked investor confidence.
The Hang Seng index’s downfall was intensified by the bankruptcy protection filing of China’s Evergrande in a U.S. court, causing a widespread decline in Asian-Pacific shares.
Following suit, the Stoxx 600 index in Europe also fell by 1% on the day and more than 3% for the week. U.S. stock futures painted a similar picture, pointing to another day of losses on Wall Street.
With the Dow Jones Industrial Average on track for its worst week since March, and the S&P 500 and Nasdaq 100 facing a third consecutive week of losses, market sentiment remains uncertain.
Adding to the concern, the Dow closed below the 50-day moving average for the first time since June 1, typically seen as a bearish signal for investors.
AJ Bell Investment Director Russ Mould commented, ‘Whether it’s the brewing crisis in the Chinese property market, the surge in U.S. bond yields, or the significant drop in U.K. retail sales, things are starting to look challenging out there.’
The market’s worries were exacerbated by the release of U.S. Federal Reserve meeting minutes, revealing concerns about “upside risks” to inflation and a willingness to increase interest rates further to stabilize price growth.
This led to a surge in U.S. Treasury yields, pushing the 10-year yield to a 16-year high. Simultaneously, 10-year German bunds rallied to their highest level since the March collapse of Silicon Valley Bank.
Amidst the turmoil, Barclays Head of European Equity Strategy Emmanuel Cau explained, ‘Markets are being hit by the perfect storm, amid surging rates, worsening economic data in China, poor summer liquidity, and a buyers’ strike.’
Cau’s analysis indicates that sentiment on China is unlikely to recover without significant intervention, causing potential challenges for European and U.K. stocks.
Barclays suggests investors adopt a ‘barbell’ approach, balancing investments in both cyclical and defensive stocks with a ‘value tilt,’ which involves focusing on stocks trading at a discount relative to their financial fundamentals.
Furthermore, U.K. retail sales were dampened by wet weather, dropping 1.2% in July, below economists’ consensus forecast of a 0.5% decline.”
