Blame China’s growing crackdown on its offshore listed companies or is the slide in US bond yields a signal of fears about economic growth, or a reaction to another surge in Covid infections in some parts of the world?
A month ago, analysts confidently forecast US 10-year bond yields – the key global interest rate – would rise towards and reach 2% by the end of this year because of continuing fears about inflation.
Yields peaked at 1.77% in the final days of March on fears about rising cost pressures, the strengthening US pace of economic activity, and a belief that the Fed would have to lift rates next year, but then they fell away.
That saw yields dip to the low 1.40% range, rise back above 1.50%, then ease in the final week of June.
The volatility came as data emerged confirming rising US headline consumer and producer price inflation as well as core inflation as measured by the Fed’s favourite measure, so-called the Personal Consumption Expenditure Index.
US employment improved – more than 800,000 jobs were created in June and wages edged up to an annual rate of 3.6%; labour shortages have popped up in some sectors of the economy, prices continue to rise for new and used cars, cereals, petrol, travel, natural gas and house prices.
And yet the markets listened and accepted Fed assurances that the rise in inflation was “transitory”, despite the Fed itself signalling a longer period of higher costs, and its -so-called ‘dot plot’ suggesting most of the central bank’s senior officials saw interest rates rising from late 2022.
Ten-year bond yields dipped from 1.48% last Thursday to 1.44% on Friday and then, after the holiday on Monday, lurched sharply lower to five month lows around 1.36% on Tuesday and then dipped lower still in early Asian dealings on Wednesday.
The slide on Tuesday surprised traders and helped the Dow lose 200 points and triggered a small loss for the S&P 500, but not the Nasdaq where the strength of some tech stocks held it in the green.
But the surprise was at the slide itself in bond yields and the size because falls like we saw on Tuesday are usually associated with growing worries about the health of the economy or uncertainty about the future direction of equities or commodities.
Covid infections are back as a factor as they rise in parts of the South Korea, US, UK, Japan and Indonesia, India, again, Australia and other countries, sparking fears of more lockdowns and economic dislocation.
The minutes from the Federal Reserve’s Federal Open Market Committee meeting in June tonight were also cited as a factor.
The market expects them to confirm a hawkish – or anti-inflation – tilt, but a reassuring, ‘inflation is transitory’ tone could trigger a rally.
The rise, then slide in oil prices was fingered by some analysts as the catalyst for Tuesday’s bond yield slide, but that’s nowhere near as big a concern.
Of concern is the continuing crackdown in China by the Communist Party directed government against the country’s big tech groups – and now other companies.
The government and the party have already humiliated Alibaba and its founder, Jack Ma, crippled several other smaller groups with a crackdown on data retention (such as Tencent) ended crypto currency mining in many parts of the country and then at the weekend hit share ride giant, Didi Global (China’s Uber) with strange claims about data sharing.
That was after Didi listed shares in the US last week and saw a solid performance. Some analysts reckon the Communist Party is determined to punish Chinese giants that list shares in the US as a way of attacking the American markets and system.
That fear took root on Monday and Tuesday as the US shares in Didi fell 21%.
Didi’s app was removed from mobile app stores in China on Sunday by the Cyberspace Administration of China (CAC), to the regulator to investigate its own claims that Didi illegally collected users’ personal data.
On Monday, the CAC announced cybersecurity investigations into other China-based companies whose US-listed shares also slid.
Kanzhun Ltd and Full Truck Alliance were last down 17.4% and 14.3%, respectively for example.
Extending its actions beyond the tech companies, the Communist Party-directed government said it would step up supervision of Chinese companies listed offshore in order to crack down on illegal activity and punish fraudulent securities issuance.
That saw shares of non-tech Chinese companies listed in the US join the slide. For example, shares in Chinese hip-hop event promoter Pop Culture Group plunged 32%.
The renewed pressures on big Chinese companies continues to put downward pressure on sharemarkets in China and Hong Kong.
After falls of 3% and more last week, the Shanghai and Hong Kong markets have continued to weaken this week.
China’s CSI 300 (which includes the biggest stocks on the Shanghai and Shenzhen exchanges) is now down 3.50% so far this year. Hong Kong’s Hang Seng is up by 3% (while markets in Australia and the uS are up between 11% and 14%).
This attack on big Chinese companies with shares listed offshore is a clear attempt to stop them becoming independent of the Chinese government and its hardline regulators determined to bring these groups back under state control.