U.S. futures pointed to a 0.3% drop for the S&P 500 index following its recent record highs, while Europe’s Stoxx 600 index also edged lower. The decline was amplified by a significant drop in shares of SAP SE, which tumbled after reports revealed that the German software developer, along with other companies, is under investigation by U.S. officials for potentially conspiring to overcharge government agencies over the past decade.
Traders are on the lookout for new catalysts as last week’s half-point interest rate cut by the Federal Reserve had initially spurred a greater risk appetite. However, recent policy measures from China have not generated much momentum beyond Asian markets, raising doubts among investors about their effectiveness in revitalizing the country’s struggling economy.
Central banks across Europe are drawing attention, particularly Sweden’s Riksbank, which cut borrowing costs and hinted at further reductions in the coming months. The Czech Republic is also expected to announce a policy decision soon. Market participants have started pricing in an October rate cut by the European Central Bank, bolstered by remarks from Governing Council member Klaas Knot, who indicated that gradual easing may occur “in the near future.”
On Tuesday, U.S. equities reached a new record largely due to gains from Nvidia Corp, although this was offset by a significant decline in the Conference Board’s consumer sentiment index—the largest drop since August 2021. The report raised concerns about a potential slowdown in the labor market, coinciding with disappointing manufacturing data.
“The decay in perceptions of available jobs was striking,” commented Carl Weinberg, chief economist at High Frequency Economics. “It also sends a warning signal about the state of the economy to financial markets.”
In response to the data, swaps traders have increased their expectations for more than a three-quarter point of policy easing by the end of the year, suggesting that at least one more major rate cut from the Fed is anticipated. Investors are eagerly awaiting comments from Fed Chair Jerome Powell on Thursday, as well as data on the Fed’s preferred inflation measure on Friday, which may provide further insight into the trajectory of future rate reductions.
China’s Economic Stimulus Efforts
On Wednesday, China’s central bank implemented a record reduction in the interest rate on its one-year policy loans, building on the extensive stimulus package announced a day earlier.
A Bloomberg gauge of commodities rose for the eleventh consecutive day, marking its longest winning streak since January 2018. Key commodities like iron ore rallied, and gold prices reached new record highs.
These policy boosts come amid a backdrop of Chinese stocks hitting a five-year low, as the government’s piecemeal approach to stimulus has failed to restore confidence in the market. Challenges such as deflationary pressures, weak consumer spending, and a prolonged slump in the property sector continue to undermine hopes for a swift economic recovery.
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