Risk assets tumble as Fed, China cause concern

Risk assets from European equities to Asian stocks and cryptocurrencies fell on Friday as worries about China and higher global interest rates sapped sentiment.

The benchmark Stoxx 600 dropped 0.4%, poised for its third weekly decline — the longest run in almost a year. A gauge of Asia’s shares were on pace for the worst week in eight, with equity benchmarks for Japan, China and South Korea all lower. 

Global markets took a beating this week amid the prospect of entrenched inflation and bond yields at levels last seen before the financial crisis. At the same time, concern over China’s faltering economic growth and widening housing crisis quashed appetite for risk and fueled signs of contagion. 

The rise in bond yields “has the ability to dent what has been a very resilient year for risky assets,” said Tim Graf, head of macro strategy for EMEA at State Street Global Markets. “We are in the seasonally weakest time of the year for equities and volatility is still relatively low.”

US Treasuries took a pause from this week’s selloff. Yields on the bonds inched lower across the curve after those on the 10-year note on Thursday came close to their October peak, the highest since 2007. 

Contracts for the Nasdaq 100 slid 0.2%, after the index notched its worst three-day slide since February. Futures for the S&P 500 were flat after the index declined 0.8%, also its third daily decline.

Bitcoin fell 4.5% on Friday, and was headed for its biggest weekly decline in three months, after touching a low of $25,314. Elon Musk’s SpaceX has sold Bitcoin, according to The Wall Street Journal, adding to the selling pressure.

“Markets are being hit by a perfect storm amid surging rates, worsening data in China and poor summer liquidity,” Emmanuel Cau, a strategist at Barclays Plc, wrote in a note.

The week’s broad risk-off direction follows Wednesday’s publication of minutes from the last Federal Reserve meeting that suggested officials are considering tighter policy, slamming hopes that the central bank was done raising rates.

Investors will be looking to next week’s gathering of policymakers at Jackson Hole in Wyoming to gauge Fed sentiment. 

China Pushback

In China, there were growing signs that policymakers are trying to limit the selloff. The People’s Bank of China delivered its strongest ever pushback against a weaker yuan via its daily reference rate, helping to support the currency. This followed news Chinese authorities had told state-owned banks to step up support for the yuan.

State-owned developers warned of widespread losses, adding to concerns that the housing crisis is expanding from the private sector to companies with government backing. There are signs of contagion, with Australian miners on track for their worst week in five months, given how reliant they are on Chinese demand.  

“We have a lot of uncertainty about the Chinese economy,” Hebe Chen, an analyst for IG Markets, said on Bloomberg Television. “The market is now standing at a crossroads about whether or not we can continue to talk about the Chinese recovery story or should we shift the narrative to China slowing down or even entering a recession.”

The slump in stocks comes as investors must decide whether to roll over about $2.2 trillion of longer-dated options contracts tied to stocks and indexes that are scheduled to mature on Friday. That has led Goldman Sachs Group Inc. to warn that the activity is fueling the recent market selloff.

Elsewhere, Brent crude was set to notch its first weekly drop — ending a run of seven advances — as traders weighed signs of tightening supplies against concerns about the Chinese economy and US monetary policy.

Key events this week

• Eurozone CPI, Friday

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 fell 0.4% as of 8:18 a.m. London time
• S&P 500 futures were little changed
• Nasdaq 100 futures were little changed
• Futures on the Dow Jones Industrial Average were little changed
• The MSCI Asia Pacific Index fell 0.6%
• The MSCI Emerging Markets Index fell 0.8%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.0876
• The Japanese yen rose 0.4% to 145.29 per dollar
• The offshore yuan was little changed at 7.3034 per dollar
• The British pound fell 0.2% to $1.2723

Cryptocurrencies

• Bitcoin fell 4.2% to $26,483.09
• Ether fell 1.6% to $1,690

Bonds

• The yield on 10-year Treasuries declined four basis points to 4.24%
• Germany’s 10-year yield declined eight basis points to 2.63%
• Britain’s 10-year yield declined seven basis points to 4.68%

Commodities

• Brent crude was little changed
• Spot gold rose 0.2% to $1,892.90 an ounce

This story was produced with the assistance of Bloomberg Automation.