1. Global Stocks slip on China downgrade, ahead of Fed minutes

Global Stocks slip on China downgrade, ahead of Fed minutes

World stocks inched lower on Wednesday after China's sovereign credit rating was downgraded and as investors eyed a pause in Wall Street's four-day winning streak, the longest in over three months. The dollar and US bond yields were steady as investors awaited the minutes from the Federal Reserve's last policy meeting.

By: | Published: May 24, 2017 5:23 PM
Europe’s index of leading 300 shares was flat on the day around 1,540 points, MSCI’s global share index was down 0.1 percent and US stock futures pointed to a fall of up to 0.1 percent

World stocks inched lower on Wednesday after China’s sovereign credit rating was downgraded and as investors eyed a pause in Wall Street’s four-day winning streak, the longest in over three months. The dollar and US bond yields were steady as investors awaited the minutes from the Federal Reserve’s last policy meeting. An interest rate rise next month is now 75 percent priced in, according to futures market pricing.

Oil wiped out earlier gains ahead of OPEC’s meeting on Wednesday at which the cartel is expected to lead an output cut extending into the first quarter of next year. Europe’s index of leading 300 shares was flat on the day around 1,540 points, MSCI’s global share index was down 0.1 percent and US stock futures pointed to a fall of up to 0.1 percent at the open on Wall Street.

Markets were mostly quiet on Wednesday, lacking impetus from fresh economic or corporate drivers. Investors shrugged off the rise in Britain’s terror threat level to maximum in the wake of Monday’s attack in Manchester, and the slide back in market volatility helped put a floor under stocks. “China’s debt downgrade by Moody’s has made investors a little less sure of themselves,” said Jasper Lawler, senior market analyst at London Capital Group.

“A little uncertainty before what could be an important update on the path of U.S. interest rates via Fed minutes is also capping some of the enthusiasm,” he said. Germany’s DAX and France’s CAC 40 were both down 0.2 percent, and Britain’s FTSE 100 was up 0.3 percent to within 20 points of last week’s record high of 7,533.70 points.

MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.1 percent, while Japan’s Nikkei stock index ended 0.7 percent higher. MSCI’s index of global shares fell 0.1 percent. On Tuesday the S&P 500 and Dow Jones Industrials edged higher for the fourth day in a row, their longest winning streak since February.

FED MINUTES

In its first downgrade of the country in nearly 30 years, Moody’s cut China’s rating by one notch to A1 from Aa3, saying it expects the economy’s financial strength to erode in coming years as growth slows and debt continues to rise. China’s massive debt has been at the centre of concerns among economists and Beijing is walking a fine line as it tries to contain financial risks.

Moody’s has no specific timetable for revisiting China’s rating but will monitor conditions on a regular basis, Marie Diron, associate managing director of Moody’s Sovereign Risk Group, told Reuters. She said the risks to China’s financial system were “broadly balanced.”

The Shanghai stock index and blue-chip CSI300 index both shed around 0.5 percent on the news but had recouped almost all these losses by the close of trade. The Australian dollar, regarded as a proxy for China due to the country’s status as a major trading partner, lost nearly half a percent on the news but by mid-session in Europe it was flat on the day at $0.7475.

The U.S. dollar pulled away from recent 6-1/2 month lows as investors pored over President Donald Trump’s first full budget plan. Containing no major surprises, the plan called for an increase in military and infrastructure spending but also cuts to social spending in areas such as healthcare and food assistance.

U.S. Treasury Secretary Steven Mnuchin said he hoped to get tax reform passed this year, though this would not happen by August. Attention now shifts to the minutes of the Fed’s latest policy meeting, scheduled to be released at 1800 GMT on Wednesday.

“Our U.S. economists expect the minutes to come down on the hawkish side and continue to expect the Fed to hike in June and September and announce balance sheet reduction in December,” Citi analysts wrote on Wednesday.

The dollar index, which tracks the greenback against a basket of six major rivals, was flat on the day at 97.35. The greenback was steady against the yen at 111.80 and the euro was also steady at $1.1183. U.S. Treasury yields were flat across the curve, with the 2-year at 1.3175 percent and the 10-year at 2.28 percent.

Oil relinquished all its earlier gains. U.S. crude was unchanged on the day at $51.50 per barrel as was Brent crude at $54.26. Spot gold was flat at $1,251 an ounce.

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