U.S. Stock Futures Fall as Chinese Economy Weakens

Introduction

U.S. stock futures took a hit early Tuesday following interest rate cuts by the People’s Bank of China. The move failed to ease concerns about the weakening activity in the world’s second-largest economy. Recent data showed that retail sales and industrial production in China grew less than expected in July. Combined with signs of distress in the property sector, this prompted the central bank in Beijing to implement a series of interest rate cuts. However, this unexpected monetary policy easing, along with the government’s decision to stop publishing youth unemployment data, only further spooked the markets. As a result, S&P 500 futures and prices for China-sensitive industrial commodities like oil, copper, and iron ore declined.

Chinese Concerns Dampen Global Risk Appetite

The recent data from China, coupled with the ongoing distress in the property sector, has raised concerns about the health of the country’s economy. The interest rate cuts by the central bank were aimed at boosting economic activity. However, the move seems to have had the opposite effect, causing investors to worry about the lack of government spending and the panic it may indicate. Stephen Innes, managing partner at SPI Asset Management, believes that while the rate cuts were warranted, their impact is likely to be neutral or even unfavorable due to the underlying confidence crisis in China.

Focus on U.S. Household Sector

As the Wall Street opening bell approaches, investors are turning their attention to the health of the U.S. household sector. Consumption, which accounts for more than two-thirds of the U.S. economy, has remained resilient despite the Federal Reserve’s increase in borrowing costs over the past 16 months. Earnings results from Home Depot, due before the regular session opens, and the U.S. retail sales figures for July will be closely watched for any signs of consumers pulling back. Other economic updates scheduled for release include the August Empire State manufacturing survey, June business inventories numbers, and the August NAHB builders confidence index.

Rising Government Bond Yields Add Pressure

Adding to the pressure on equities, benchmark government bond yields continued to rise. Despite the soft data from China, the 10-year Treasury yield rose above 4.2%, nearing 15-year highs. Mark Newton, head of technical strategy at Fundstrat, highlights the importance of U.S. Treasury yields as a possible catalyst for stock indices. He believes that while yields may fall in the coming months, there is a possibility of them rising higher in the short term. If this happens rapidly, it could further spook stock indices.

Takeaways

The concerns about a faltering Chinese economy and the impact it may have on global markets are weighing on U.S. stock futures. The interest rate cuts by the People’s Bank of China failed to alleviate these concerns, leading to a decline in S&P 500 futures and prices for China-sensitive industrial commodities. Additionally, rising government bond yields are adding further pressure on equities. Investors will closely monitor the health of the U.S. household sector through earnings results and retail sales figures. The outcome of these economic updates and the trajectory of U.S. Treasury yields will likely influence market sentiment in the near term.