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While you were sleeping: Equities sink on China, Fed

Friday 21st June 2013

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Stocks on both sides of the Atlantic sank after a report showing China's manufacturing decreased at a faster rate in May and as investors digested Federal Reserve Chairman Ben Bernanke's comments that the bank may soon begin paring its stimulus.

Yesterday Bernanke said the Fed may downsize its US$85 billion-a-month bond-buying program later this year if the economy strengthens in line with its expectations, possibly ending the program by mid-2014. Bloomberg today reported the pace could drop to US$65 billion a month after the Fed's September policy meeting. 

Wall Street continued its decline today. In late afternoon trading in New York, the Dow Jones Industrial Average sagged 2.17 percent, the Standard & Poor's 500 Index slumped 2.12 percent and the Nasdaq Composite Index slid 2.04 percent. 

In Europe, the benchmark Stoxx 600 Index sank 3 percent from the previous close, as did the UK's FTSE 100. Germany’s DAX dropped 3.3 percent, while France’s CAC 40 fell 3.7 percent.

Bernanke will cut the Fed’s US$85 billion in monthly bond purchases by US$20 billion at the September 17-18 policy meeting, according to 44 percent of economists in a Bloomberg survey.

"The committee, and even Bernanke’s remarks, showed a surprising degree of confidence in the outlook,” Michael Feroli, chief US economist for JPMorgan Chase & Co in New York and a former Fed economist, told Bloomberg. “I’m a little more surprised that they were willing to signal they’re on the path of moving out of this set of Fed policies.”

US Treasuries also fell, pushing yields on the 10-year note as high as 2.47 percent.

The greenback gained, climbing 0.6 percent against the euro and 1.6 percent versus the yen.

Reports today showed evidence supporting the Fed's upbeat outlook for the world's largest economy. US home resales climbed to the highest level in 3-1/2-years last month, while factory activity in the Mid-Atlantic region posted the strongest reading in two years.

Existing home sales increased 4.2 percent to an annual rate of 5.18 million units, according to the National Association of Realtors. The Philadelphia Federal Reserve Bank said its business activity index rose to 12.5 in June from minus 5.2 in May.

"I think the markets are going to be very sensitive to all economic reports—anything that suggests that growth is picking up, that the Fed really is going to scale back bond purchases," Bruce Bittles, chief investment strategist at Robert W Baird & Co in Nashville, told Reuters.

Separately, initial claims for state unemployment benefits rose 18,000 last week to a seasonally adjusted 354,000, according to the Labor Department. The four-week moving average increased 2,500 to 348,250.

"Where jobless claims are right now should tell you that the economy is doing okay, that it's on a decent path," Brett Ryan, an economist at Deutsche Bank Securities in New York, told Reuters.

Also worrying investors were further signs of a slowdown in China, the world's second-largest economy. The preliminary reading for a Purchasing Managers Index fell to 48.3 in June, down from 49.2 in May, according to HSBC and Markit Economics data. 

"Beijing prefers to use reforms rather than stimulus to sustain growth," Hongbin Qu, chief economist, China & co-head of Asian economic research at HSBC, said in a statement. "While reforms can boost long-term growth prospects, they will have a limited impact in the short term. As such we expect slightly weaker growth in 2Q.”

The interest rates Chinese banks must pay to borrow money from each other jumped to a record.

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