Markets have been waiting for China to take action to support their economy, which was finally delivered last night in the form of a 15 bps cut to interest rates.
Investors, however, are not impressed.
Historically, Chinese stimulus has been bullish for risk assets, including cyclical equities and you’d expect a rally immediately after China announced stimulative measures.
Not only did the rate cut fail to buoy London’s-leading index heavily weighted to China-focused stocks, but investors also continued to offload miners and financials, including Standard Chartered, HSBC and Prudential, with substantial operations in Asia.
There is a feeling the rate cut did not go far enough, and China’s economy would continue to slow. The FTSE 100 was down over 100 points to 7,404 at the time of writing.
The FTSE 100’s descending triangle technical formation we discussed yesterday remains intact and the index looks set to test 7,300.
UK wages
Piling pressure on UK equities on Tuesday, UK wages grew at the fastest pace since records began in 2001 in July. Faster wage growth is not conducive to falling inflation, and futures markets quickly priced in higher UK interest rates.
Sterling rose against the dollar, further dragging UK equities.
“Alarm bells are ringing on UK inflation once more as the latest figures from the Office for National Statistics show record wage growth,” said AJ Bell investment director Russ Mould.
“This builds pressure on the Bank of England and has prompted an increase in sterling and gilt yields, as well as a big fall in UK stocks, as it suggests inflation is becoming increasingly entrenched in the economy. However, it is a fine balance. Other elements of the ONS data show signs the labour market could be cooling, with an increase in unemployment and a drop in the number of vacancies.
“Previous rate hikes are likely to have a lagged impact and this data covers an April to June period which is very much in the rear-view mirror now. It all adds up to a very tricky situation for the brains trust in Threadneedle Street which might only be further complicated by the CPI release tomorrow.”
FTSE 100 movers
The aforementioned China-focused financials and miners were among the biggest losers on Tuesday. Still, the selling was broad, with only two of the FTSE 100’s constituents trading positively at the time of writing.
Investors sold Legal & General shares after the group reported lower operating profit and a sharp drop in assets under management. This is a problem experienced throughout the sector, and Schroders, abrdn and Pheonix Group were also weaker on the day in sympathy.
The prospect of more interest rates as wages soar hit the housebuilders, and the recent rally in the sector continued to break down.