European stocks managed a rebound on Monday following last week’s decline, while government bond yields resumed their upward trajectory. The uptick in oil prices persisted even as China implemented rate cuts that fell short of investor expectations.
China’s central bank chose to trim its one-year lending rate by 10 basis points while leaving its five-year rate unchanged. This unexpected move caught analysts off guard, as many had anticipated cuts of 15 basis points for both rates. China’s economy, the world’s second-largest, has encountered headwinds from a deteriorating property market, sluggish spending, and declining credit growth, all of which have dampened its recovery prospects.
Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown, noted that while China’s modest stimulus efforts may have left some investors underwhelmed given the scope of the challenges across sectors, it has nevertheless fueled hopes for more substantial measures in the future. The anticipation of further stimulus remains, but immediate action seems restrained by the yen’s vulnerability.
Although this news led to a decline in Asian shares, with Chinese blue chips shedding 0.4% and other Asian indexes experiencing drops, European shares commenced the day on an upward trajectory.
Europe’s STOXX 600 index rose 0.7% by 0914 GMT, rebounding from last week’s 2.3% dip. Energy companies demonstrated resilience as oil prices gained strength due to tightening supply from Saudi Arabia countering concerns about demand. U.S. stock futures also exhibited gains.
Oil prices posted an increase on Monday, recovering from a seven-week winning streak break last week that was triggered by concerns over Chinese demand. Brent crude surged by 36 cents to reach $85.16 per barrel, while U.S. crude climbed by 41 cents to $81.66 per barrel.
In the bond market, the sell-off that propelled government borrowing costs to their highest point in over a decade regained momentum on Monday.
Longer-term U.S. Treasury yields ascended by another 3-4 basis points on Monday, with the 30-year yield reaching a fresh 12-year peak at 4.44%.
The highlight of the week is the U.S. Federal Reserve’s Jackson Hole conference, where expectations are that Chair Jerome Powell will address the surge in yields and the recent string of robust economic data. The Atlanta Fed’s GDP Now tracker is projecting a robust 5.8% for this quarter.
Barclays analyst Marc Giannoni stated that the conference provides an opportunity for Powell to offer an updated assessment of economic conditions, which appear to be stronger than anticipated. This could further reinforce the case for additional rate hikes, though Giannoni believes that Powell might refrain from providing specific guidance, considering key August indicators such as employment, CPI, and retail sales are pending before the September meeting.
A majority of polled analysts believe the Fed has concluded its rate hikes, while traders are placing bets on just under a 40% probability of a final rate hike by November.
The U.S. dollar, which has garnered five consecutive weeks of gains due to rising bond yields, traded flat on Monday against a basket of currencies, hovering just below the two-month highs achieved on Friday.
The euro managed a 0.2% gain against the dollar after last week’s 0.7% loss.
The appreciating dollar and climbing yields put pressure on gold, which traded at $1,888 per ounce, having touched a five-month low last week.
Liquefied natural gas (LNG) prices received support from the risk of a strike at Australian offshore facilities that could impact roughly 10% of global supply. Europe’s benchmark TTF front-month wholesale gas contract surged by 3% to 38.75 euros, compared to its early August peak of 43 euros.
Earnings were also a focal point, with shares of Dutch payments processor Adyen dropping 6% on Monday, marking a 48% decline over the past three sessions following weak earnings on Thursday that raised concerns about the company’s valuation.
Earnings from AI-focused Nvidia, scheduled for Wednesday, will be another crucial assessment of valuations.