Global stocks extend falls into new month on darkening outlook

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Global stock markets kicked off September on a downbeat note, extending their declines into a fifth day as weak Chinese data and new Covid-19 lockdowns in the world’s second-largest economy weighed on sentiment.

A FTSE gauge of worldwide shares lost 1.3 per cent on Thursday, having closed the previous session down 0.6 per cent. Wall Street’s broad S&P 500 gauge fell 0.7 per cent at the New York opening bell, while the tech-heavy Nasdaq Composite dropped 1 per cent. Europe’s regional Stoxx 600 gauge fell 1.6 per cent.

In Asian markets, Hong Kong’s Hang Seng lost 1.8 per cent and mainland China’s CSI 300 fell 0.9 per cent after Chinese authorities moved to lock down the south-western megacity of Chengdu as they stuck to the country’s zero-Covid policy.

A survey of manufacturers in China also came in worse than expected, with the Caixin manufacturing purchasing managers’ index registering a reading of 49.5 for August — down from 50.4 in July and below expectations of 50.2. Any figure below 50 signals contraction.

Grace Ng, a JPMorgan economist, said the report raised “concerns of slowing external demand”.

Later on Thursday, a separate S&P Global manufacturing index hinted at a worsening picture in the eurozone, giving a reading of 49.6 from 49.7 in July.

Thursday’s equity market declines came after hawkish rhetoric from the US Federal Reserve put the brakes on this year’s summer rally. Fed chair Jay Powell said last week at the Jackson Hole Economic Symposium that the central bank would “keep at it until the job is done” on inflation.

Rate-setters in major economies around the world are pushing ahead with monetary policy tightening in an effort to curb rapid price growth, even as higher borrowing costs threaten to exacerbate a protracted slowdown.

On Wednesday, Jeremy Grantham, co-founder of asset manager GMO, heralded an “epic finale” to the current “superbubble”, saying that the current scenario in markets “features an unprecedentedly dangerous mix of cross-asset overvaluation (with bonds, housing, and stocks all critically overpriced and now rapidly losing momentum), commodity shock, and Fed hawkishness”.

While “each cycle is different and unique, every historical parallel suggests that the worst is yet to come”, he added.

German and UK bond prices extended Wednesday’s declines after eurozone inflation hit 9.1 per cent in August, higher than economists’ forecasts of 9 per cent.

The European Central Bank is due to announce an interest rate decision next week. It raised borrowing costs earlier in the summer for the first time in more than a decade by an unexpectedly large 0.5 percentage points to zero.

Morgan Stanley on Thursday joined the ranks of other Wall Street institutions anticipating an even bigger 0.75 percentage point rise at the ECB’s September meeting.

“We think it is a very close call, with good arguments on each side, but ultimately think those advocating for a larger hike will prevail as September offers the best opportunity to send a clear signal of determination,” analysts at the US investment bank said.

US government debt came under pressure on Thursday in a sign of persistent worries over rate rises, with the yield on the 10-year Treasury note adding 0.13 percentage points to 3.26 per cent. Those moves steepened after fresh data signalled a tightening US labour market, with first-time claims for unemployment coming in at 232,000 for the week ending August 27 versus estimates of 248,000.

The yield on the two-year note, which closely tracks interest rate expectations, added 0.05 percentage points to 3.5 per cent, hitting a new 15-year high. Bond yields rise as their prices fall.

Anticipation of tighter monetary policy and a drawn-out recession has already fuelled angst about companies’ financial health, with the gap in yield between high-yield US corporate debt and government bonds widening in recent weeks. The spread, reflecting the premium investors demand for taking on more risk, has climbed from just over 4.2 percentage points in mid-August to 5 percentage points at Wednesday’s close, according to an Ice Data Services index.