Markets Impacted by China News and US Retail

On Tuesday, August 15, markets around the world declined over worries about weak economic data from China and a drop in US bank stocks following yet another ratings agency, Fitch, warned that it may downgrade the credit rating of "dozens" of banks, including majors such as the JPMorgan Chase (JPM). Moreover, US Retail Sales in July beat expectations, with the hotter-than-expected numbers suggesting more Fed action. 

The Dow Jones Industrial Average (USA 30) ended the session 1.02% lower, putting an end to a three-day winning streak, while the S&P 500 (US 500) suffered a similar fate, down 1.16% and below its 50-SMA. The Nasdaq (US-TECH 100) also showed a notable decline at the close, 1.14% lower. 

The Dollar Index (DX), which measures the strength of the US dollar against six major counterparts, including the euro (EURUSD), pound (GBPUSD), and yen (USDJPY), held on to its one-and-a-half month high. This follows the release of US retail sales showing resilience among US consumers despite the Fed's aggressive rate hiking program. Other currencies seemed to be showing weakness following China’s troubling economic data and action by the PBOC to try to shore up an unexpected slowdown in the Chinese economy. 

Market-Moving Data

The global sell-off on Tuesday occurred in the context of underwhelming news from China combined with data from a week full of retail-related events. US Retail Sales for July rose to 0.7%, handily beating the consensus of expectations among analysts for growth of just 0.4%. (Source: Yahoo Finance)

The US Retail Sales data suggested that US households are being supported by a strong labour market that's providing wage growth and supporting the economy in the face of a possible recession instigated by high interest rates. But the better data also suggests that the Fed could take more action in the face of inflationary pressure. Currently, the chances of another rate hike this year are seen at less than 50% by traders, as measured in the futures market.

Meanwhile, the situation in China continued to disappoint markets on Wednesday, August 16, with Asian stocks seen lower following economic data out of the world's second-largest economy. New home prices fell in China for the first time this year, the latest indicator of a series of data points that point to a fast drop in economic momentum. Market analysts said they were disappointed with what they refer to as a lack of "meaningful" stimulus by the Chinese government to support flat consumer activity. 

What's Going on in China?

The real estate sector in China, seen as the pillar of the nation's economy, has been in difficulties since a series of developer defaults in late 2021. In the last few days, the debt crisis in the sector has intensified, with a series of private developers starting debt restructuring initiatives. This happened in the context of property investment again falling for the 17th month, dropping 17.8% from the prior year. New construction starts were down 24.5% compared to the prior year.

Country Garden (6098.HK), which used to be one of China's largest developers, missed a coupon payment on August 7 and last week suspended trading in eleven domestic bonds after issuing a warning that it will report an annual loss of $7.5B. JPMorgan said that a default in this company could lead to contagion in the Chinese property sector and the border economy. Country Garden has a much bigger portfolio of developments than Evergrande, which defaulted back in 2021 at the start of China's property crisis. in the wake of the latest defaults in the Chinese property sector, JPMorgan raised its default rate forecast for other emerging markets. 

Future Implications

Prolonged weakness in the property sector is seen weighing on China's economy, and economists worry that it's at increasing risk of not meeting its 5% growth target this year. The latest series of negative data pointed to the economic slowdown, and the government suspended the publication of data on youth unemployment after it had reached record highs recently. Economic momentum might stay subdued for the rest of the year if the Chinese government doesn't offer more stimulus, according to economists. 

On a different front, banks in the US were among the largest decliners in continued action from rating agencies. Fitch Ratings warned it might have to downgrade the creditworthiness of many US banks after Moody’s cut its credit rating for ten banks last week while putting another eleven on watch negative. 

Notably, individual banks cannot be rated higher than the entire sector, with major banks like JPMorgan and Bank of America (BAC) risking a downgrade from an AA-reading to an A+ if Fitch were to downgrade the sector. Federal Reserve President of Minneapolis Neel Kashkari said he was in favour of raising capital requirements for banks, pointing to the possibility of inflation rising and higher rates putting pressure on regional banks, causing a repeat of conditions that led to a crisis earlier this year.

Conclusion

Global equities sold off on Tuesday as better-than-expected retail sales in the US contracted with weak economic data out of China. Concern over an economic slump in China weighed on global markets, as the country was expected to drive global growth this year. Markets were impacted after strong retail sales numbers in the US pointed to a stronger economy that could have the Fed potentially raising rates again if strong demand translates into more inflationary pressure. As global markets react to the latest events, could there be a shift in market trends?