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European and Asian stocks slip on China economic rebound fears

European stocks fell on Tuesday as China’s smaller-than-expected rate cut damped investor sentiment, while US futures remained subdued after the Federal Reserve last week signalled more tightening to come.

Europe’s region-wide Stoxx 600 lost 0.4 per cent, extending early morning losses, while Germany’s Dax dropped 0.6 per cent and London’s FTSE 100 was flat.

Raw materials stocks led losers in the region, with the Stoxx 600 Basic Resources index dropping for the fourth successive session, as investors fretted that China’s sluggish economic recovery would curb demand.

The moves came after the People’s Bank of China lowered the country’s mortgage-linked five-year loan prime rate to 4.2 per cent from 4.3 per cent, undershooting investors’ expectations of a 0.15 percentage point cut.

China’s benchmark CSI 300 stock index fell 0.2 per cent after the announcement, dragged down by losses in property stocks. The Hang Seng China Enterprises index of Hong Kong-listed mainland companies dropped 1.8 per cent. 

“The risk with this incremental rate-reduction approach is that potential homebuyers will expect further mortgage reductions and therefore hold off purchases, depressing home sales activity,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.

China’s policymakers also reduced the country’s one-year loan prime rate by 0.1 percentage point to 3.55 per cent in an effort to bolster growth in the world’s second-largest economy following three years of severe Covid-19 restrictions.

Goldman Sachs over the weekend lowered its estimate for China’s gross domestic product growth in 2023 to 5.4 per cent from 6 per cent, noting that a weak property market and low investor confidence continued to stall economic recovery.

Meanwhile, contracts tracking the US benchmark S&P 500 dropped 0.4 per cent and those tracking the tech-heavy Nasdaq 100 fell 0.5 per cent, as Wall Street prepared to reopen after a federal holiday on Monday.

Both indices traded lower last Friday, as investors grew concerned over the Fed’s hawkish remarks on the path for future interest rates. Markets currently expect policymakers to lift rates by 0.25 percentage points at their next meeting in July, according to data compiled by Refinitiv and based on interest rate derivatives prices.

In the UK, traders prepared for the release of UK inflation data on Wednesday and a monetary policy decision from the Bank of England on Thursday. Markets expect the central bank to lift rates to a 15-year high of 4.75 per cent.

The annual rate of consumer price inflation is forecast to have edged down to 8.4 per cent in May, from 8.7 per cent in April, remaining above that of Europe and the US and far exceeding the BoE’s 2 per cent target.

Yields on two-year gilts, which are sensitive to interest rate changes, fell 0.09 percentage points to 4.97 per cent, edging down after hitting their highest level since 2008 in the previous session. Yields on the benchmark 10-year note were 0.1 per cent lower at 4.39 per cent. Bond yields rise as prices fall.

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