European stocks sold off sharply on Tuesday, after China’s central bank unexpectedly cut the rate on its one-year loans in a move to shore up the country’s stagnant economy.
Europe’s region-wide Stoxx 600 fell 1.2 per cent, extending early-morning losses, while France’s Cac 40 lost 1.5 per cent and Germany’s Dax declined 1 per cent.
Investors were digesting an unexpected move by the People’s Bank of China to lower its one-year medium-term lending facility rate, which affects loans to financial institutions.
The cut, by 0.15 percentage points to 2.5 per cent, took the rate to its lowest level since it was launched in 2014. The overwhelming majority of the market expected rates to remain unchanged.
The surprise policy move came after new data in China pointed to weak consumer and business activity in July, adding to a series of gloomy data releases last week that indicated the country had slipped into deflation and was struggling to recover from three years of severe Covid-19 lockdowns.
“Today’s data add to evidence that China’s economy is stalling, despite the gradual ramp-up of policy support,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics, noting that the rate cut was probably “an attempt to shore up confidence, both in the financial markets and the broader economy”.
The Chinese renminbi declined 0.3 per cent against the dollar to trade at 7.2838, its weakest level since November.
China’s benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks fell 0.2 per cent, while Hong Kong’s Hang Seng declined 1 per cent, as downbeat data continued to weigh on investor sentiment.
Futures contracts tracking Wall Street’s S&P 500 and those tracking the tech-focused Nasdaq 100 declined 0.6 per cent ahead of the New York opening bell.
Investors will be closely watching US retail sales growth figures for July, which economists expect to come in at 0.4 per cent, up from 0.2 per cent in the previous month.
Consumer goods giant The Home Depot is also set to report second-quarter earnings later in the day, followed by Target on Wednesday, offering additional insight into the mood of American consumers more than a year after the US Federal Reserve began its aggressive monetary tightening campaign.
“A sustained boost to stocks could have to wait until moves are made toward rate cuts, which still look some way off,” said Mark Haefele, global wealth management chief investment officer at UBS.
London’s FTSE 100 was the biggest faller in Europe, down 1.6 per cent, after data on Tuesday showed UK wage growth hit a record annual pace in the three months to June, adding to signs of persistent inflationary pressures in the country.
“UK wage growth has come in quite a bit higher than expected, and that should all but cement a September rate hike from the Bank of England,” said James Smith, developed markets economist at ING.
Yields on policy-sensitive two-year gilts rose 0.1 percentage points to 5.16 per cent, their highest level in a month, while yields on 10-year gilts edged up 0.06 percentage points to 4.62 per cent. Bond yields rise when prices fall.
The BoE will pay close attention to official UK inflation figures coming out on Wednesday, having so far struggled to keep up with its peers in the US and Europe in the global campaign to cool prices. Sterling rose 0.2 per cent against the dollar to $1.2711.