Global Stocks Open 2019 With a Tumble Over Weak Chinese Data

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by Avantika Chilkoti

Global stock markets fell on the first trading day of 2019 on deepening fears of a slowdown in the Chinese economy, extending a turbulent period for equities. The Stoxx Europe 600 was down 1% in Wednesday midmorning trade. France’s CAC 40 lost 1.8% and the U.K.’s FTSE 100 fell 1%.

U.S. stock futures pointed to opening falls of 1.4% and 1.5% for the S&P 500 and the Dow Jones Industrial Average, respectively. The downbeat mood across markets followed a tumultuous holiday period, when U.S. indexes seesawed. Nervousness over trade, the health of the U.S. economy and the path of interest rates from the Federal Reserve have driven skittish trading world-wide.

Analysts at Jefferies pointed to a “perfect” storm in the final months of 2018, including high oil prices, a strong dollar and an upward shift in the U.S. yield curve, which left markets in flux.

Still, Sean Darby, chief global equity strategist at Jefferies, said investors seem to have already priced in a recession this year, and that lower oil prices will help many major economies. Recent concessions between the U.S. and China on trade, he said, also mean worries over a protracted dispute are unfounded.


“What is worrying people is that they can’t actually pinpoint what is spurring this selling,” Mr. Darby said. “There is somebody out there, one or two players, who I suspect are in an unenviable position where there must be forced selling.”

The WSJ Dollar Index, which tracks the dollar against a basket of 16 currencies, was broadly flat. The 10-year U.S. Treasury yield ticked down to 2.663%, from 2.684% at the close of 2018. Yields move inversely to prices.

In Asia, weak Chinese economic data sent markets lower. The China Caixin manufacturing purchasing managers index fell to 49.7 in December, according to data released Wednesday. That is the first time the sector has been in contraction territory—below 50—since May 2017.

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Hong Kong’s Hang Seng Index led regional declines, falling 2.8%. The Shanghai Composite Index dropped 1.2% and Australia’s S&P/ASX was down 1.6%. Japanese stocks were closed for a public holiday.

The worst is yet to come. Looking ahead, we see more headwinds to growth from weakening domestic demand, the ongoing credit downcycle, a cooling property sector and lingering China-U.S. trade tensions,” said Nomura analysts.

Among the worst-performing stocks Wednesday were those whose health depends on the Chinese property market. China Overseas Land & Investment fell 5.6% and Country Garden Holdings fell 6.1%.

The continued economic weakness is raising expectations that Beijing will soon enact some form of stimulus, which some analysts hope would jolt markets out of their 2018 funk. The country’s Shanghai Composite Index dropped nearly 25% last year.

The Chinese economy has been buffeted by both domestic and external factors. Beijing’s attempts to rein in the country’s ballooning debt pile and tariffs applied by the U.S. government have taken a bite out of the country’s famous growth rates.

Goldman Sachs China economists expect more cuts to the reserve-requirement ratio, a main policy tool of the People’s Bank of China, during the first half of the year. Any rate cuts would likely be good news for the Chinese government bond market, which was a hit with international investors in 2018. It was one of the few asset classes world-wide to provide positive returns last year.

Fiscal stimulus would also likely come through China’s local governments, which have helped fuel the country’s debt binge since 2008. The sustainability of that increase has been a major concern for analysts and investors.

“At present markets are worried about weak Chinese growth and the improved data we expect as stimulus starts to impact the economy will allay these fears,” said Eric Fishwick, head of economic research at CLSA.

But that boost is likely to be short-lived, according to Mr. Fishwick. Stimulus will detract from Beijing’s focus on high-quality growth and renew fears that the expansion is too dependent on debt. “As growth quantity worries dissipate, the deterioration in quality will attract increasing attention,” he said.