Global markets tumble ahead of US debt vote

Global shares fell on Wednesday before a crucial vote in Washington on the US debt ceiling, while commodities and the 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 headed for its first monthly decline since February, was down 0.4% in mid-morning trade in Europe, largely due to declines across Asian markets.

US stock index futures fell by 0.3%-0.4%.

Data shows 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.

For any investors hoping for a sustained bounce in Chinese growth after the elimination of stringent Covid-19 restrictions late last year, the figures offer 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 November, when China was under public health restrictions. It was last 0.5% weaker at 7.124/$, putting in on track for a 2.6% decline this month after a series of weak readings on indicators such as industrial profits, 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 straight months, 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 such as LVMH , Burberry and Swatch Group.

Powerhouse dollar

The dollar, which was 0.5% stronger against a basket of currencies, is set for its biggest monthly rise since September, thanks to safe-haven flows stemming from concerns around the gridlock over the US debt ceiling.

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

The data didn’t do much to change interest rate expectations, though. Money markets on Wednesday showed traders expect the European Central Bank to raise rates to a peak of around 3.70% by September, from 3.25% now — hardly changed 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.

Treasuries bounce

Treasury yields fell after a deal to suspend the US 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 US default would be averted, but the market remains skittish because once it is authorised to borrow the Treasury is likely to issue plenty of debt to replenish its coffers.

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

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

Reuters