Shares drop ahead of US debt ceiling vote; China data rattles nerves

LONDON  – Global shares fell on Wednesday ahead of a crucial vote in Washington on the U.S. debt ceiling, while commodities and the Chinese yuan came under pressure after data highlighted faltering growth in the world’s second-largest economy.

The MSCI All-World Index of global shares, which is heading for its first monthly decline since February, was down 0.4 percent in mid-morning trade in Europe, largely due to declines across Asian markets.

U.S. stock index futures and fell by 0.3-0.4 percent.

Data showed China’s manufacturing activity fell more than expected in May, while services growth — which has been one of the few bright spots in its patchy recovery — slackened to its slowest pace in four months.

China’s factory activity falls faster than expected on weak demand – PMI

For any investors hoping for a sustained bounce in Chinese growth after the elimination of stringent COVID restrictions late last year, the figures offered more evidence that the economy is losing steam, further dimming the global outlook.

“If the market was hoping for China to come to the rescue, I think, on this occasion, they’re mistaken,” CMC Markets strategist Michael Hewson said. “COVID has done a lot of structural damage to the Chinese economy.”

The yuan dropped to its lowest since last November, when China was under public health restrictions. It was last down 0.5 percent at 7.124 per dollar, putting it on track for a 2.6- percent drop this month, following a series of weak readings on anything from industrial profits, to retail sales and loan growth.

The disappointment filtered through to other China-sensitive assets. The Australian dollar hit a near seven-month low of $0.6489 and is down four months in a row, while crude oil and copper sank.

In Europe, equities came under a third day of selling pressure. The regional STOXX 600 hit two-month lows, led by declines in China-focused luxury stocks like LVMH, Burberry and Swatch Group.

Dollar on a roll

The dollar, which was up 0.5 percent against a basket of currencies, is set for its largest monthly rise since September, thanks to safe-haven flows stemming from concerns around the gridlock over the U.S. debt ceiling.

Dollar hits more than two-month high as European inflation cools

The euro tumbled by as much as 0.7 percent on the day after data showed a rapid cooling in consumer price pressures in both France and Germany – the region’s two largest economies.

The data didn’t do much to move the needle on interest rate expectations, though. Money markets on Wednesday showed traders expect the European Central Bank to raise rates to a peak of around 3.7 percent by September, from 3.25 percent now, showing almost no change from Tuesday’s close.

A separate report on Tuesday showed consumer and producer price expectations have dropped sharply, but remain high by historical standards, according to Matt Simpson, a strategist at City Index.

“If prices are expected to stay high, they probably will,” he said.

Meanwhile, Treasury yields fell after a deal to suspend the U.S. debt limit and avoid a default cleared a House of Representatives committee overnight. The bill is set for debate on Wednesday, and passage would send it to the Senate where debate could stretch to the weekend.

Treasuries rallied after the initial deal was struck, on the expectation a U.S. default would be averted, but the market remains skittish as once it is authorized to borrow the Treasury is likely to issue lots of debt to replenish its coffers.

Benchmark 10-year yields, which have dropped by 17 basis points (bps) in the last two days, were last at 3.654 percent, their lowest since May 19. Two-year yields fell 5 bps to 4.428 percent.

In commodity markets, copper headed for a second monthly drop after the Chinese data, and was last trading down 0.65 percent on the day at $8,070 a ton, while Brent crude, which has lost nearly 8 percent this month, was steady at $73.59 a barrel.

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