China data puts a cloud over the global recovery, while UK prices rise

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Global markets fell on Wednesday as weaker-than-expected Chinese data clouded the economy’s recovery and a surge in UK prices stoked the heated debate about the long-term viability of inflation. The STOXX 600 index of 600 European companies fell 0.16 percent, pulling away from its all-time high of mid-August. The MSCI All Country World Index was 0.18 percent lower.

“The weak China retail sales data is a shocker and shows that unless you get the Delta variant under control, any recovery is going to be difficult,” said Michael Hewson, chief markets analyst at CMC Markets.

“There is a slow realization that we have seen peak economic growth perhaps, certainly the summer rebound is done,” Hewson said. A flurry of statistics from China revealed that growth in the country’s industrial and retail sectors slowed in August, with output and sales growth hitting one-year lows as new coronavirus outbreaks and supply disruptions hampered the country’s economic recovery.

Meanwhile, UK inflation touched a more than nine-year high last month, following the largest monthly increase in the annual rate in at least 24 years, but this was mostly due to a one-time bump that economists said would be temporary. The UK data contrasted with US data released on Tuesday, which showed that the Consumer Price Index (CPI) in August saw its smallest growth in six months, implying that inflation has likely peaked, matching with Fed Chair Jerome Powell’s long-held opinion that high inflation is temporary.

Lower inflation implies that the Fed will be under less pressure to reduce its massive asset purchases, and as a result, the yield on the benchmark 10-year note fell as low as 1.263 percent, the lowest since August 24. Yields rose to 1.2820 percent, while the dollar fell 0.124 percent.

“Inflation is not something we think will go away soon. While the base case is for inflation to moderate over a two-three year horizon, we are not betting on sharp falls in inflation,” said Valentijn van Nieuwenhuijzen, chief investment officer at Dutch asset manager NN (NASDAQ:NNBR) IP.

“The Covid impact on supply chains has been enormous so it would not be surprising to see some stickiness in inflation.” MSCI’s broadest index of Asia-Pacific equities outside Japan down 0.8 percent, while Tokyo’s Nikkei fell 0.5 percent after ending at a more than 31-year high the day before. Following the release of the Chinese data, Chinese blue chips fell 1%.

“This is not a dip, it is a falling trend that will last at least until the end of this year,” said Iris Pang, chief China economist at ING said of the Chinese data. Pang predicted a 0.5 percentage point reduction in Chinese banks’ reserve requirement ratio (RRR) in October, and said greater fiscal support was needed for small and medium-sized businesses. Shares of property developer Evergrande, which is scrambling to acquire funds to pay its numerous lenders and suppliers, plummeted for the third day in a row on Wednesday, falling as much as 5% to their lowest level since January 2014.

Hong Kong’s Hang Seng index fell 1.8 percent as casino stocks fell after Macau launched a public consultation, which investors believe may result in tougher controls in the world’s largest gambling market. An index of casino equities plunged 22%, while Wynn Macau (OTC: WYNMF) fell as much as 28% to a record low.

Oil prices rose on a larger-than-expected drop in US crude oil stocks, with US crude jumping 1% to $71.19 per barrel and Brent crude rising 0.9 percent to $74.31 per barrel. [O/R] Spot gold was little changed, trading at $1,801 per ounce, having retreated from a one-week high of $1,808.50 on hopes of lower interest rates.