Chinese government bonds experienced a notable increase following the People’s Bank of China’s (PBOC) decision to cut a crucial policy rate. This move, the first reduction in nearly a year, was aimed at bolstering economic growth and led to a dip in the yield on China’s 10-year sovereign bonds by nearly 2 basis points. Consequently, the futures for these bonds reached an unprecedented high.
Despite this positive development for bonds, Chinese equities fell in early trading, contributing to broader declines across Asian markets, which saw downturns from Japan to Australia, largely due to persistent challenges in the technology sector. Meanwhile, U.S. stock futures showed modest gains.
The U.S. dollar weakened by 0.1% on Monday, as a Bloomberg index tracking the currency’s strength declined. This occurred alongside stable Treasury yields. The Mexican peso appreciated, while gold and Bitcoin experienced gains, with Bitcoin reaching its highest level in over a month.
Investor sentiment has been heavily influenced by recent political developments in the U.S. Joe Biden’s announcement that he would cease his reelection campaign and support Vice President Kamala Harris has heightened speculation about the upcoming November election. The acceleration of bets on a Donald Trump victory followed an assassination attempt on the Republican candidate last week. The impact of Biden’s withdrawal on these bets remains a point of contention among investors.
Hebe Chen, an analyst at IG Markets, noted, “With significant surprises emerging for the second consecutive week, Asian markets are under intense scrutiny. The wave of risk aversion could have a more profound impact on Asian equities compared to the previous week as investors grapple with the new political landscape. Additionally, the forex market is likely to face increased pressure.”
In the U.S., the S&P 500 fell by 0.7% on Friday, concluding its worst week since April. Technology stocks, in particular, were under pressure ahead of upcoming earnings reports. CrowdStrike Holdings Inc., involved in a major IT failure that disrupted global operations, saw its shares plummet by up to 15% before recovering slightly.
Looking ahead, Tesla Inc. and Alphabet Inc., two of the “Magnificent Seven” tech giants, are set to release their earnings reports on Tuesday. Analysts will focus on Tesla’s advancements in robotaxi technology and Google’s revenue growth driven by artificial intelligence.
Over the weekend, Chinese President Xi Jinping unveiled an extensive plan to strengthen the financial position of China’s local governments. This strategy includes reallocating a greater portion of revenue from central to local governments, such as increasing regional shares of consumption tax.
Bob Savage, head of markets strategy and insights at BNY Mellon, commented, “As with most such documents, the plan lacks details on how Chinese leaders will achieve these objectives, many of which involve conflicting policies. The tension between China’s growth and stability continues to loom over APAC markets, keeping the Chinese yuan and commodities under close observation.”
In response to the PBOC’s rate cut, Chinese banks also reduced their primary benchmark lending rate for the first time since August 2023, further supporting economic growth.
This week, market participants will be closely monitoring European economic data, U.S. second-quarter growth figures, and a range of corporate earnings reports. Additionally, the Bank of Canada will announce its rate decision, and the Federal Reserve’s preferred inflation measure will be released.
