Equities ease as China stimulus concerns rise

OVERNIGHT

Major equity indices across Asia are mostly trading in the red, in part driven by speculation that China stimulus measures may disappoint. Reports from Friday’s State Council, which was chaired by Chinese Premier Li Qiang, were light on detail in terms of potential measures and timings, and instead referred to a need to adopt ‘more forceful’ measures and respond in a swift manner to support the economy. Separately, foreign ministers from the US and China were reported to have had a ‘candid, substantive and constructive’ meeting on Sunday as efforts were being made to improve the relationship between the two nations.

THE DAY AHEAD

The day ahead is void on any major data releases, however, a number of European Central Bank (ECB) policymakers are due to speak. At last week’s policy meeting, the ECB raised interest rates by 25bps to 3.5% for the deposit rate, an eighth increase in as many monetary policy meetings. President Lagarde reiterated that there is still “ground to cover” and that, unlike the US Fed, the ECB is not pausing.

With new ECB economic forecasts showing higher underlying inflation pressures resulting mainly from a stronger labour market and wage pressures, the ECB signalled that it is highly likely to raise rates again at the next meeting in July. However, beyond that there is uncertainty over how much higher rates may go in the eurozone. While both the Fed and the ECB are ‘data dependent’, markets appear to attach higher conviction levels to more ECB policy tightening. Speeches today from Simkus (09:00 BST), Lane (12:00), Schnabel (12:40), Villeroy (14:00) and de Guindos (19:00) will be watched closely by markets for clues on what the comments of individual members of the rate setting body imply about the likely path of euro interest rates. 

Elsewhere, there is a lack of any major events or central bank speakers. However, in the US, the NAHB housebuilders survey for June will provide some insight into how much higher interest rates in the US are currently impacting on sentiment about the  housing market. The headline survey measure is expected to rise modestly from 50 to 51 as a strong labour market and low inventory levels continue to support activity.

MARKETS

With US markets closed for Juneteenth day holiday there has been no trading in cash treasuries. Movements in the US dollar have been limited as a result, which has meant that GBP/USD is little changed since last Friday, trading just above 1.28. However, it is worth noting that the pound is up around 2% since last Monday, on expectations that the Bank of England will have to raise interest rates further in order to tackle the higher rate of inflation seen in the UK, relative to that seen in the US and Eurozone.