Global stock markets have lost about $3tn in value this month, as a “witches’ brew” of gloomy Chinese economic data and surging US borrowing costs sours investor sentiment after a bumper start to the year.
Wall Street’s S&P 500 index, Europe’s Stoxx 600 and China’s CSI 300 have shed a cumulative $2.8tn — about 5 per cent of their aggregate value and more than the entire market capitalisation of London’s FTSE 100 — in the three weeks to August 21, according to Refinitiv data analysed by broker AJ Bell.
An MSCI index of global stocks is on course for its worst month since last September, despite a rebound on Tuesday.
The declines paint a stark contrast to the six months to June when expectations that US interest rates would soon peak propelled the Nasdaq Composite stock market index to its strongest first half of the year in 40 years.
But a string of robust US economic data and stubbornly high eurozone core inflation have forced investors to rethink the path of inflation and interest rates. Meanwhile, evidence is growing that China’s economy is stalling and struggling to recover from its pandemic lockdowns, while concerns are mounting over the country’s vast real estate sector.
Bad news out of China, sagging sentiment and a “swirl of other negatives” adds up to “a witches’ brew of risk-off forces”, said Mike Zigmont, head of trading and research at Harvest Volatility Management. “Some pullback [on the S&P 500] was merited” after it became “very overbought” at the end of July, he added.
“Complacency has gone,” said Emmanuel Cau, head of European equity strategy at Barclays. The market’s rapidly shifting concerns “challenge the soft landing hype and hurt equity valuations”, he added.
Yields on bonds on both sides of the Atlantic have jumped in recent weeks, squeezing equity valuations further: those on Treasury bonds adjusted for inflation, a fundamental measure of how much it costs for companies to borrow money, hit a 14-year high.
In the US, energy is the only sector to have climbed in August. Technology stocks have been one of the biggest drags on the market, with the so-called “Magnificent Seven” of Amazon, Apple, Microsoft, Meta, Nvidia, Tesla and Google parent Alphabet — which had driven the market rally in the first seven months of this year — all suffering their first three-week net losing streak this year.
Apple, the largest of the seven, has fallen about 10 per cent this month, while Tesla, the worst performer, has lost around 13 per cent. All eyes are now on chipmaker Nvidia, which reports second-quarter results on Wednesday. Expectations are high, with at least 10 analysts raising their target price for the shares last week, according to Reuters.
August has been “ugly”, said Stuart Kaiser, head of equity trading strategy at Citi. “The past [two-to-three] weeks have seen a shift” in market sentiment, he said, “and stocks don’t like it”.
Purchases of bearish put options — the right to sell at a certain price — are outnumbering bullish call options by nearly 10 per cent, close to the largest gap over the past two years, according to Kaiser. Investors are not as cautious as in March 2020 or September last year but there is “some degree of caution”, said Mike Coop, chief investment officer, Emea at Morningstar Investment Management.
For some, the pullback is a sign of a healthy market. “The market has been discerning as opposed to giving a free ride to [Big Tech] and that you do want to see,” said Quincy Krosby, chief global strategist at broker LPL Financial. “It makes me nervous when investors just say ‘sure, come on in’ to all names in a sector.”
But the more deep-seated problems that dog China, and concerns that US interest rates are staying higher for longer, continue to overshadow investors’ considerations.
Analysts are growing increasingly nervous that the outlook for Chinese stocks has been undermined by Beijing’s failure to follow through on vows, made in late July, to shore up the cash-strapped property sector and boost consumer sentiment.
“The costs of policy delay and mis-steps are rising”, said Xinchen Yu, emerging markets strategist at UBS. “Forceful measures must be delivered within weeks” if China is to hit its 5 per cent annual growth target.
Investors are more downbeat on Europe and China than the US. Morgan Stanley expects European stocks to fall by 10 per cent during the summer, as a “double whammy” of “much higher interest rates and much tighter credit conditions” weigh on consumers and businesses alike. Europe’s heavy reliance on slowing Chinese demand presents a further risk.
“Confidence is kind of the wild card right now in China,” said Minyue Liu, investment specialist at BNP Paribas Asset Management. “Market sentiment is pretty low and any kind of policy support would be positive, but if it’s just a one-shot measure it may not change much,” Liu said. “We need a series of policy support actions and clearer direction.”
And while economic indicators remain robust in the US, some managers see a risk that tighter monetary policy will eventually damage growth, further hurting stocks.
The Fed’s policies will mean “spending will come down, and unemployment will rise, tipping the economy into a mild recession”, said Brent Schutte, chief investment officer of the Northwestern Mutual Wealth Management Company.
“A recession will act like a wet blanket for the stock market,” he added.